Posts Tagged ‘TARP’

“Send Treasury Your Retired, Your Not-So-Poor, Your Befuddled Classes Yearning To Invest Risk-Free…”

Thursday, February 9th, 2012

If they continue on their current course, the architects of America’s fiscal and monetary policies might want to consider the above revision to Emma Lazarus’ great exhortation on the pedestal of the Statue of Liberty. For it is in no small measure the flight of capital from investment on other shores that’s has been driving down yields on United States Treasuries, allowing the US to borrow with remarkable abandon despite ratings downgrades and Washington’s ongoing budget follies. As forbidding as the US debt and deficit might be, last year investors continued to bid up America’s debt, lowering the interest cost to finance economic stimulus programs while keeping tax rates unchanged. This injection of capital has almost certainly helped to spur the nascent US recovery, just as some economists argue pre-war European flight capital helped lift America out of the Depression in the later 1930’s.

Washington has had various factors to thank for the easy credit terms the world continues to offer. From Iranian saber-rattling to Japanese earthquakes, many forces served to drive frightened capital into the arms of the US Treasury market. However, at the top of the list is surely the political leadership of the Eurozone. The Obama-Boehner show has nothing on the extravaganza headlined by Merkel and Sarkozy, with a supporting cast of various and changing guest stars governing the solvency-challenged PIIGS (Portugal, Ireland, Italy, Greece and Spain) and of course the folks at the IMF and ECB (every comedy needs a few straight men and women, after all). This noisome cavalcade had provided a continuous flow of confidence-shaking news, keeping sovereign default risk and systemic shock ever present in investors’ minds. Meanwhile, the US has muddled through a budget deal which, while insufficient in the long run, indicated some capacity for concord even in the current poisonous political atmosphere. Similarly, the Fed, aided by TARP financing, seemed to succeed in stabilizing the American financial system. Through late in 2011, the result was an increase in the cost of euro-denominated borrowing for key large Euro sovereigns with the exception of Germany, the yield on whose bunds declined almost in lockstep with a simultaneous drop in US Treasury bond yields.

At the time of this writing, with the “voluntary” Greek debt restructuring talks dragging on, observers may understandably have a difficult time conceiving of an end to “Euro-fear.” Nevertheless, it is precisely the possibility that, with or without Greece in it, the Eurozone will find a way to get its house in some kind of order that threatens America’s ultra-low borrowing costs. We are in fact seeing some tentative signs of, as Churchill put it, not the end or even the beginning of the end, but perhaps the end of the beginning.

New ECB president Mario Draghi’s Long Term Refinancing Operation ostensibly provides a three-year, multi-hundred-billion euro stabilization line of credit to European commercial banks, but as the ECB is “allowing” (read: encouraging) those banks to use this credit to buy better European sovereign bonds (and avoid having to dump weaker Euro nation credits in bulk) what we’re really seeing is a back-door program to lower European states’ borrowing costs. Because the ECB loans represent money created by the central bank, this is a form of bailout that does not require direct taxation of “core” European nations citizens (e.g. Germans), though to be sure, they may end up paying the price through inflation (see “Europe Learns To Default The American Way, Restoring Transatlantic Balance Of Irresponsibility”) and devaluation, though export-driven economies like Germany actually need a weaker currency more than they might like to admit (“It’s Hard To Make That German Export Wiener Without PIIGS – And That Goes For Chinese Dumplings, Too”).

Second, whether or not the Greek debt restructuring talks result in a formal default or an effective one (and the contemplated 70% write-down will surely be a default in fact if not in name) is not so important as whether the process is orderly. So long as any any write-offs and triggered credit default swaps are handled in a way that does not lead to bank runs and frozen markets, such an event could be kept contagion free. There is no guarantee such a systemically benign scenario will play out, but the aforementioned willingness of the ECB to inject liquidity on a massive scale does provide reason for optimism.

And therein lies the rub for US government borrowing costs: as the Eurozone crisis subsides, so may the safe haven “panic bid” on US Treasuries, causing the yields on those bond to rise and further increasing the burden on American taxpayers of financing the deficit. Indeed, the 10 year US Treasury yield has crept up from below 1.87% in late November of last year to over 2.02%, while conversely (and despite it’s own rating downgrade), France’s ten year debt yield declined to below 2.90% since spiking above 3.73% during the same period. Similarly, the Italian 10 year yield dropped from over 7.36% to less than 5.49%.

To be sure, there are significant benefits to the US economy in this “risk-on” shift; the reduction in Eurofear has bolstered equity markets with a knock-on wealth effect boosting consumption and, yes, tax-revenue even in the absence of a rate hike. Even so, higher T-bond rates translate into an increased cost of servicing America’s heavy debt, so even if the core Euro countries seem to be picking up the tab, their Greek holiday may not come without cost for Uncle Sam.

N.B.: One advantage of a weakened euro – cheaper French wines (in dollar terms), and in particularly that said-to-be-excellent 2009 Bordeaux vintage; for insight into this and all things vino, check wine expert (and Duke econ grad) Jessica Bell’s very excellent webcasts at

To Stimulate Job Creation, Try Helping People Who Actually Create Jobs

Tuesday, January 26th, 2010

First, a simple fact: according to the Small Business Administration firms with less than 500 employees created 64 percent of all new jobs in the U.S. during the fifteen years up to 2008, and employ over half of all private sector employees in the country. So, naturally, when Washington looks to allocate bailout and stimulus funding, the largess goes straight to bloated, uncompetitive layoff champs like General Motors.

So here’s a crazy thought: how about a little help for folks who actually have some idea how to employ people and make a profit doing it? The potential bang for the buck would be considerably higher in aiding small, innovative firms, or at least in getting out of their way. To do so, however, one has to craft solutions that acknowledge the special problems small firms have in this economy. Here are three approaches:

1) Cut small business payroll taxes. Tax cuts are part of the answer, but recognize that the recent downturn has sharply reduced or eliminated profits for many small businesses, and that early-stage firms usually operate at a loss or “burn rate” even in the best of economic conditions. (Note this last point is also true for older small firms reinventing themselves – a critical ability in an era of both innovation and financial stress – which is why focusing only on new firms would be a mistake). What this means is that while an income tax break for small business is certainly advisable, it will be of limited short term help to firms with little or no current taxable income. This is even more true for the administration’s proposed capital gains cuts for small companies, since such firms rarely have earnings in this form. If we want to help small business, a reduction or moratorium on the payroll taxes small business must pay regardless of profitability is probably the surest way to quickly aid struggling yet promising firms. Because the first priority should be to prevent layoffs and allow retention of the people needed to expand the enterprise and set the stage for future hiring, this cut should apply to the current payroll, not just the new employees the Senate jobs bill targets for tax credits.

2) Provide seed grants for small business in hard-hit urban centers. Cities are natural incubators for small business, providing extensive infrastructure and facilitating networking with an energy efficiency far higher than most suburban or rural locations. But these also tend to be high local tax and cost of living environments, partly because of their disproportionate role in addressing national social issues. In an anemic economy this higher cost structure can drive struggling firms out of town or out of business before they get strong enough to help sustain the city – for example, consider the demise of New York’s Silicon Alley. Federal “urban angel grants” could be used to counterbalance this effect, especially in formerly expanding new business districts that have recently fallen into decline.

3) Encourage venture capital. Access to capital is also critical for small business, and especially for start-ups. Surveys have shown that lack of bank loan availability, while an issue for such firms, is not at the top of their list of current problems. This is partly due to the fact that, with demand for their products and services having fallen so sharply, funding expansion is less of a priority. However, for early stage companies, debt is not the dominant means of financing. In fact, most early stage venture capital is provided in the form of equity, especially convertible preferred (this is a point a few of my economist friends will recall I demonstrated in a paper attributing the phenomenon to problems with debt’s foreclosure option under high probability of “asymmetric information” i.e when entrepreneurs are more likely to know more about the condition of their start-up than venture capitalists). Because this type of funding plays so key a role in backing new and innovative firms, venture capital financing needs to be encouraged right now, and care must be taken to make sure any new taxes and rules do nothing to harm venture capital formation. This means exempting venture capital investments from any coming increases in long term capital gains rates (indeed, cutting this rate would help) as well as from costly regulation contemplated for other financial activities (VC firms had nothing to do with the current crisis and what limited hedging they may do in the securities markets constitutes little systemic risk).

One might reasonably and even urgently ask where the money to do any of this would come from. The answer is from reallocation of some of the funds in the stimulus plan, much of which is slated to be spent sub-optimally. Alternatively, some of the unexpectedly high returns on TARP funds paid back by large banks might be used. Of course, there would be some merit in using these funds to simply reduce the deficit, but if the political winds cannot be prevented from blowing money off Capital Hill, at least let those gusts help fill the sails of a vessel of hope for real job creation. The name of that ship is small business.

New York’s New Darling

Thursday, December 10th, 2009

If you love New York, you have to love Alistair Darling.

The United Kingdom’s Chancellor of the Exchequer yesterday told Parliament he proposes to slap a 50% tax on bank employee bonuses in excess of 25,000 pounds (about $40,633). This new levy might be the greatest escape from peril the British have allowed Americans in New York since Howe let Washington retreat into Manhattan after the Battle of Brooklyn Heights in 1776.

The recent crisis has left the U.S. financial sector facing a rising tide of regulation, which, combined with the prospect of healthcare reform-driven tax hikes, have made the States a considerably less inviting abode for banks, hedge funds, private equity firms and the like. Onerous NY state and city taxes have only compounded a situation Britain might have taken advantage of by holding taxes steady or even (perish the thought!) easing off on banks. This would have allowed City of London-based firms to bid up for talent while restoring their capital. But Darling and the rest of Prime Minister Gordon Brown’s Labour Party are facing bleak prospects in an election that must be held by June of next year. By sticking it to the City, Brown, Darling & Co. hope to play on populist resentment enough to narrow the electoral gap, at least to the point of creating a hung Parliament and denying the Conservative Party a clear majority.

To this end, Darling’s latest proposal is part of a larger program of eye-popping tax increases. Indeed, the bonus tax, to be paid by the banks themselves as opposed to employees, comes on top of an increase in the marginal personal tax rate from 40% to 50%. Throw in National Insurance and Bloomberg reports the British Treasury will receive 103% of every quid paid to top City earners.

With his latest move, the Chancellor has, for the moment, decisively ceded the competitive advantage back to Wall Street, even with New York and America’s challenging tax and regulatory environment. Darling’s tax, not to mention uncertainty about future British taxes, should mean more jobs and revenue for NYC as international banks and financial firms move easily transferable personnel to offices and trading desks to the western shore of the pond.

When you think about it, it’s the least Darling could do, since the UK’s refusal to back Barclay’s bid for Lehman last year helped usher the later firm into bankruptcy (and its choice assets into Barclay’s hands at fire sale prices). A bit more than a year later it’s another story for the Yanks: Darling’s gift comes just as Bank of America repays its TARP loan and Citi appears poised to do the same, which would remove the largest US banks from Washington-imposed pay caps and enhance their ability to poach London-based talent.

There remain, however, several flies in the Big Apple’s sauce. Darling’s bonus tax is currently envisioned to be a one-time “raid” through April (i.e. just before the election) and once this pandering expires, so will much of NY’s newfound advantage. Higher UK taxes may encourage yet more levies on US firms, dulling the edge Labour has granted America. And the authorities in Beijing seem to lack Downing Street’s generosity, meaning Shanghai may do to NYC what London has demurred from. Further, NYC  need not look across oceans for potential rivals – Greenwich has already taken half the hedge fund business and Jersey City is siphoning away back office jobs from Lower Manhattan.

On the other hand, today French President Nicholas Sarkozy is said to be considering matching Darling’s bonus tax, and, being this is France, at a lower level (27,000 euros, or about $39,750) Of course the land of the 35-hour work week has been a self-hamstrung global competitor for a long time; this move simply safeguards Paris aginst acquiring any unexpected competitive advantage.

Financial service jobs, like money itself, can and do move across boarders with relative ease. High taxes and stiff regulation in one financial center will often only encourage rivals to take the opposite tack so as to garner a greater share of an industry which, lest we forget, remains a huge generator of both jobs and tax revenue. If Wall Street and the United States hope to remain the center of global finance, Washington would do well to remember what London has been kind enough to forget.