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Soapbox: The Video Store, Reinvented by Necessity

July 30, 2011 by Leave a Comment

A hippie revival session? A flash-mob theatrical performance?

No. Just another night at Vidiots, one of the Los Angeles area’s last independent video stores.

Over the years, the spread of video-purveying giants like Netflix and Redbox has sounded a death knell for smaller brick-and-mortar video stores, even as some of the Goliaths, including Blockbuster, have faltered themselves.

But through it all, a few scrappy Davids have held on. And now, in the face the latest assault on their base — in the form of Netflix’s online streaming service — they are struggling to stay afloat by rethinking their business models. They are tapping into new revenue streams in ways that may seem quaint and old-fashioned, but that are proving to be culturally astute and financially viable.

“We just got so into survival mode,” Patty Polinger, co-owner of Vidiots, said of the decision she and her business partner, Cathy Tauber, made to throw the equivalent of a Hail Mary pass and start changing their store’s modus operandi after 26 years.

A campy sing-along night is just one component of their plan. Since Vidiots, a beloved institution among the area’s movie cognoscenti and stars, opened a sleek space called the Annex a year ago, it has offered a “Film Studies” program. It has had classes on anime mythology; lectures by filmmakers like Larry Clark (“Kids”); and spoken-word events, known as Tail Spin, where participants deliver improvised monologues on a theme (for example, “the stranger”) for five minutes before the thread is picked up by someone else.

Physically, too, the Annex symbolizes a new era. Its clean, modern design bears no resemblance to the graffiti-covered walls of the video store, which feels more like a basement clubhouse.

The special events have been integral to Vidiots’ transformation from a strictly retail business to a cultural hub and community center. They are intended as a riposte to what the store’s fans regard as the nameless, faceless quality of services like Netflix.  

“We felt that with Netflix and the Internet, what we should be focusing on was community and people talking to each other,” Ms. Polinger said. “We just wanted to go the other extreme and be more interpersonal.”

The changes have helped strengthen the store financially, she says. Whereas at one time “I felt like we were in freefall mode, I now feel we’ve stabilized,” she says.

Other retailers are thinking along the same lines as Ms. Polinger. This fall, Videology, a rare video store in Williamsburg, Brooklyn, is opening a cafe and bar, where a dozen kinds of beer will be on tap, and movie screenings and trivia nights will take place.

And at CineFile Video in Los Angeles, long a mecca for Fassbinder and Godard enthusiasts, Josh Fadem, a comedian who works as a clerk at the store, occasionally performs a free stand-up act.

The movement toward community-building goes beyond marketing. It is also tapping into a cultural impulse to connect with something, or someone, in a digital age. In this way, it is not all that different from the local food movement, or a decision to buy asparagus at a farmer’s market instead of at a superstore. 

Consumers a need “to have a choice, and the choice is in support of independent whatever — independent bookstore, independent grocery store, independent video store,” said Milos Stehlik, executive director of Facets Multi-Media, an art house film company in Chicago that exhibits, rents and sells films. Ms. Polinger said Facets, which also runs a series of film classes for children and adults, was an inspiration for Vidiots’ new direction.

“People make an effort to reach out to something real, so the one thing they appreciate here, is we are very knowledgeable,” Mr. Stehlik said. “People who work in the video store are very knowledgeable about film. There’s always a conversation, not just a click. Those kinds of real experiences, you can’t really duplicate when you’re getting a movie out of a vending machine.”

Still, clicking is a tempting convenience, even for purist movie geeks who believe that viewing pictures on anything other than 35mm film is blasphemous.

Maybe there is a third way, incorporating both approaches. Peter Fader, a professor of marketing at the Wharton School of the University of Pennsylvania, said video stores should position themselves not as an adversary of Netflix, but rather as an alternative.

“What I see happening is that people will use this kind of service as a complement to Netflix,” Professor Fader said. “A lot of movie watching will be on Netflix or video on demand or other sources, but when there is a particular title that’s impossible to find, or a particular event happening — be it a speaker or an activity — it will be something that’s a part of their movie consumption portfolio.

“I think that’s more likely the path to success than being the small, anti-Netflix kind of club,” Professor Fader added, pointing to bookstores’ initially dismissive attitude toward Amazon.com as a lesson in how not to compete with new technologies.

Video stores may get their biggest reprieve as a result of their bête noir. Netflix’s controversial recent 60 percent price increase — for its monthly package of online movie streams along with one DVD by mail at a time — has spawned customer outrage and some cancellations. Furthermore, the notion that Netflix’s future appears to be in online streaming, not DVD’s, may return some business to video stores, given that fewer movie titles are now available via streaming.

“I see a ray of hope with the Netflix thing, and people’s frustration with that,” Ms. Polinger said. “I’ve seen a couple people come in after giving up on Netflix. There’s definitely a backlash.”

Then she paused and sighed.

“Now if we could just be the last one standing.”

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Can Microsoft Make You ‘Bing’?

July 30, 2011 by Leave a Comment

MIKE NICHOLS has a poster on his office wall. It shows the young Muhammad Ali glaring down at a fallen Sonny Liston, the bruising heavyweight who had seemed invincible — until Ali beat him, in 1964, in one of the biggest upsets in sports history, and then beat him again a year later.

“The triumphant underdog,” Mr. Nichols says, nodding toward the wall.

The inspirational fight poster is fitting, because Mr. Nichols, a general manager at Microsoft, is a lieutenant in an underdog corporate army here. Its daunting mission is to take on the Google juggernaut.

Microsoft’s assault on Google in Internet search and search advertising may be the steepest competitive challenge in business today. It is certainly among the most costly. Trying to go head-to-head with Google costs Microsoft upward of $5 billion a year, industry executives and analysts estimate.

As the overwhelming search leader, Google has advantages that tend to reinforce one another. It has the most people typing in searches — billions a day — and that generates more data for Google’s algorithms to mine to improve its search results. All those users attract advertisers. And there is the huge behavioral advantage: “Google” is synonymous with search, the habitual choice.

Once it starts, this cycle of prosperity snowballs — more users, more data, and more ad dollars. Economists call the phenomenon “network effects”; business executives just call it momentum. In search, Google has it in spades, and Microsoft, against the odds, wants to reverse it.

Microsoft has gained some ground. Its Bing search site has steadily picked up traffic since its introduction two years ago, accounting for more than 14 percent of searches in the American market, according to comScore. Add the searches that Microsoft handles for Yahoo, in a partnership begun last year, and Microsoft’s search technology fields 30 percent of the total.

Yet those gains have not come at the expense of Google. Its two-thirds share of the market in the United States — Google claims an even higher share in many foreign markets — has remained unchanged in the last two years. The share losers have been Yahoo and smaller search players.

The costs for Microsoft, meanwhile, keep mounting. In the latest fiscal year, ended in June, the online services division — mainly the search business — lost $2.56 billion. The unit’s revenue rose 15 percent, to $2.53 billion, but the losses still exceeded the revenue.

Microsoft is a big, rich company. But investors are growing restless at the cost of its search campaign. In May, when David Einhorn, the hedge fund manager, called for Steven A. Ballmer, Microsoft’s C.E.O., to be replaced, he pointed to the online unit as a particular sore spot.

Qi Lu, president of Microsoft’s online services division, sees the situation this way: “To break through, we have to change the game. But this is a long-term journey.”

MR. LU, 49, knows about long journeys — and persistence. His grandparents raised him in rural China, in a home without running water or electricity. A bright student, he won a scholarship to the doctoral program at Carnegie Mellon.

After stints at the Almaden Research Center of I.B.M. and at Yahoo, where he was in charge of its search and search ad technology, he joined Microsoft at the end of 2008. He was recruited by Mr. Ballmer, who assured him that Microsoft was committed to search and competing with Google for the long haul.

Paul Yiu came from Yahoo two years ago, impressed by Microsoft’s approach to competing in search. A business and product manager, Mr. Yiu had spent most of his career in Silicon Valley, often working for Microsoft adversaries like Netscape and Oracle.

He explains that in the valley, with its job-hopping and start-up culture, there is a “renters’ mentality”: if things aren’t working out, just move on. At Microsoft, he says, there is a “homeowners’ mentality”: a dedication to making things work.

“If you’re in the expensive search game, you need to have a homeowners’ mentality,” Mr. Yiu says.

Microsoft’s leadership knew years ago that becoming a real competitor to Google would take patience as well as dollars. In 2007, Mr. Ballmer met with Harry Shum, a computer scientist who led Microsoft’s research lab in Beijing at the time. Mr. Ballmer, as Mr. Shum recalls, told him that the company wanted to make a concerted push in search and bring in leading technical experts and business managers.

“You spent 10 years in research, and now you’ll spend the next 10 years in search,” he remembers Mr. Ballmer saying to him.

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Senate Struggles to Muster Republican Support for a New Fiscal Compromise

July 30, 2011 by Leave a Comment

“We now have a level of seriousness with the right people at the table,” Senator Mitch McConnell, the Republican leader in the Senate, said during a news conference he held with Speaker John A. Boehner. He said that Republicans were now “fully engaged” in discussions with the White House and that he expected a deal soon.

Both men expressed confidence they could find an acceptable resolution to a crisis that has nerves frayed on Capitol Hill, a tension illustrated in a heated House debate where House Republicans pre-emptively rejected the latest debt limit proposal from Senator Harry Reid, the Nevada Democrat and majority leader.

Just how they would get a resolution remained unclear given the months of partisan fighting over the debt limit and the fact that any deal would have to clear a Senate controlled by Democrats and a House dominated by Republicans who as recently as last Thursday had rebelled against Mr. Boehner’s own proposal.

In another indication of some possible movement toward an agreement, President Obama called Mr. Reid and Representative Nancy Pelosi, the House Democratic leader, to the White House on Saturday afternoon to confer over the situation. The burst of activity came as Senate Democrats struggled to round up Republican support for Mr. Reid’s plan, which is scheduled for a vote early Sunday morning.

Their efforts were set back Saturday when 43 of the 47 Republican senators signed a letter to Mr. Reid saying they would not back his proposal that would allow a $2.4 trillion increase in the debt ceiling in two stages while establishing a new Congressional committee to explore deeper spending cuts. The numbers signaled that without changes in the plan, Mr. Reid would not be able to overcome a Republican filibuster, which requires 60 votes.

House Republicans signaled their disapproval of the Reid plan by holding a symbolic vote on Saturday, rejecting it by a 246 to 173 vote, in a move intended to show it had no chance of passing in that chamber. About a dozen Democrats joined Republicans in rejecting the Reid plan.

The pre-emptive vote could strengthen the hand of Mr. McConnell as he seeks additional concessions from Mr. Reid.

Mr. Reid, for his part, said Mr. McConnell was dragging his feet on beginning talks to find a compromise solution, and he called on Republicans to offer their plans to alter his measure.

“We have heard very little from the Republicans,” Mr. Reid said on the floor. “My friend the Republican leader must generate some more action on the part of his Republicans.”

But Mr. McConnell, in a floor exchange with his Democratic counterpart, indicated that Republicans wanted to first have a chance to oppose Mr. Reid’s measure before entering new talks. He also demanded that the president take part in any final negotiations.

“We’ve got a couple of days to work this out and we can’t do it without the president,” Mr. McConnell said.

The unusual Saturday session came after a week of brinkmanship on Capitol Hill. On Friday, Mr. Boehner managed to pass his own House bill, along party lines, just a day after suspending the vote as the Republican leadership tried frantically to line up enough votes for passage. But that plan was swiftly rejected by the Senate late Friday.

While some of the back-and-forth between the House and Senate and the party leaders was typical of the late stages of a negotiation, the combative and unyielding tone in both chambers of Congress was creating more pessimism about the prospects that a final agreement could be struck and cleared before Tuesday.

Mr. Obama, who has warned that the government could run short of money as soon as Wednesday morning, laid the blame for the impasse squarely on House Republicans in his weekly address, which largely repeated remarks he made on Friday as the stalemate gripped Washington.

“Democrats in Congress and some Senate Republicans have been listening and have shown themselves willing to make compromises to solve this crisis,” he said. “Now all of us — including Republicans in the House of Representatives — need to demonstrate the same kind of responsibility.”

In the Republican video response, Senator Jon Kyl of Arizona said that “Republicans have tried to work with Democrats” to raise the debt ceiling, “but we need them to work with us.”

Though the current Senate plan was in serious trouble, Democrats and the administration were exploring ways to adjust it to win some Republican backing and send it back to the House as a final offer to raise the debt limit and avert a default after Tuesday.

If a measure is able to win significant bipartisan endorsement in the Senate, the reception in the House could be different with the Treasury Department’s Aug. 2 deadline for increasing the debt limit imminent.

Jackie Calmes contributed reporting from Washington, and Thom Shanker from Kandahar, Afghanistan.

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Fair Game: Some Bankers Never Learn

July 30, 2011 by Leave a Comment

YOU’D think the mortgage bust would qualify as a teachable moment.

But some people refuse to learn from mistakes — a list that apparently includes certain mortgage bankers. Their industry is fighting a new rule that might prevent a repeat of the lending binge that helped drive our economy off a cliff.

In case you just arrived from another planet: America’s mortgage mania was fueled by home loans with poisonous features that made them virtually impossible to repay. It was fun while it lasted, at least for the financial types who profited by making dubious loans and selling them to investors.

But the Dodd-Frank financial overhaul last year barred lenders from making home loans before determining that people could probably repay them.

(It’s depressing that we have to legislate common sense, but, hey, that’s the world we live in.)

Dodd-Frank also required regulators to define the characteristics of loans that would most likely be repaid. The idea was to ensure that banks had skin in the game when they bundled risky mortgages into securities.

The proposal was this: If a mortgage security contains only high-quality loans, the banks can sell the entire offering. If the investments included riskier mortgages, the underwriters must keep 5 percent of the issue on their own books.

Basically, Wall Street would have to eat a bit of its own cooking.

Earlier this year, the Federal Reserve, the Federal Deposit Insurance Corporation, the comptroller of the currency, the Securities and Exchange Commission, the Federal Housing Administration, the Federal Housing Finance Agency and the Department of Housing and Urban Development all agreed on what makes a mortgage most likely to perform well. They examined how different types of loans defaulted, and the attributes of the borrowers in question. Then they invited the public to comment on their proposal; that comment period ends tomorrow.

One attribute of safer loans, the regulators found, was that homeowners had made a down payment of at least 20 percent. Another was that their housing debt did not exceed 28 percent of their monthly income, and that their total debts did not exceed 36 percent.

In other words, regulators said, a relatively low-risk mortgage should look an awful lot like the ones that local banks made before the days of securitization on steroids. Regulators also said that the origination costs on low-risk mortgages should no more than 3 percent of the amount borrowed.

THE mortgage industry squawked. It would prefer that we return to the days of high-fee, anything-goes lending. That is not surprising. But what is surprising is that mortgage bankers are leaning on the same tired argument — that saner lending requirements will undermine the goal of expanding homeownership.

In a comment letter filed with regulators last week, David Stevens, the president of the Mortgage Bankers Association, warned that the requirements on down payments and debt-to-income ratios were “unnecessary and not worth the societal costs of excluding far too many qualified borrowers from the most affordable mortgage loans to achieve homeownership.”

Mr. Stevens, who last March left his job as federal housing commissioner at the Department of Housing and Urban Development, didn’t mention the enormous costs associated with reckless lending. We are still tallying the bills, but to date, taxpayers have funneled $154 billion to Fannie Mae and Freddie Mac. Investors have suffered even greater damage.

While we are discussing societal costs, let’s not forget how minority borrowers and first-time homebuyers were the targets of predatory lenders who lured them into toxic loans loaded with fees.

A study issued last week on the widening wealth gap between minorities and white Americans points to the costs of predatory lending. Conducted by the Pew Research Center, a nonpartisan organization, the study noted that housing woes were the principal cause of precipitous declines in household net worth among both Hispanics and blacks from 2005 through 2009. The organization found that, adjusted for inflation, the median wealth of Hispanic households fell by two-thirds during that period. The wealth of black households declined 53 percent. The net worth of white households fell only 16 percent.

And yet, Mr. Stevens noted in his letter that the mortgage bankers were “working in harmony with a very wide coalition of consumer advocates, civil rights groups and other industry associations, to educate policy makers and legislators concerning this rule.”

One wonders how people who have lost their homes because of abusive lending practices feel about their “advocates” forming an alliance with mortgage lenders on this issue.

Mr. Stevens also argues that restricting mortgage fees to 3 percent, as proposed, would hurt borrowers by reducing their access to credit. Noting that his association opposes excessive fees, he wrote that his group “knows of no data evidencing that points and fees have affected borrowers’ ability to repay their loans.”

He told a different story when he was at HUD overseeing the portfolio of loans insured by the F.H.A.

Testifying before Congress in May 2010, Mr. Stevens cited five years of F.H.A. data showing that loans in which the seller of the property helped defray a borrower’s origination costs by more than 3 percent, known as a sellers’ concession, experienced significantly greater default rates.

In 2008, for example, F.H.A.’s insurance claims on loans where sellers covered 3 percent to 6 percent of buyers’ costs were 50 percent higher than claims on loans where concessions from sellers fell below 3 percent.

The higher concessions created “incentives to inflate appraised value,” Mr. Stevens testified. In other words, high costs do have consequences.

Mr. Stevens, through a spokesman, declined to comment.

As the advocate of the mortgage banking industry, Mr. Stevens is entitled to express the industry’s views. But it would be troubling if such arguments gained traction with regulators. In the years leading up to the crisis, the Mortgage Bankers Association and other financial trade groups persuaded regulators to postpone or water down rules that could have reined in subprime lending relatively early. We all know the consequences — and surely do not need to repeat past mistakes.

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Fundamentally: Avoid Europe? It’s Not Easy to Do

July 30, 2011 by Leave a Comment

The answer is far from simple, market strategists say.

For starters, Europe is hard to avoid — stocks there account for around a quarter of the world’s total market capitalization. Moreover, investors who are thinking of shifting money out of the region don’t have many attractive alternatives in the global markets, money managers say.

Japan’s economy, for one, is expected to contract this year in the aftermath of the earthquake and tsunami that devastated parts of the country, according to a report this month by the International Monetary Fund. Central banks in many fast-growing emerging markets like China and Brazil, meanwhile, have started to increase interest rates to tame inflation overseas, which have led to losses in their stock markets.

At the same time, European stocks have held up remarkably well despite the debt crisis and expectations that gross domestic product in the euro zone will grow at an annual rate of less than 2 percent from now to 2014.

So far this year, the Morgan Stanley Capital International Europe index has returned around 6 percent, outpacing the 4 percent total return of the Standard Poor’s 500 index of domestic shares.

To be sure, much of that gain is a product of a surprisingly resilient euro, which is up nearly 8 percent against the dollar since the beginning of the year. But even after the currency effect is stripped out, European stocks have still lost only about 1 percent for the year in total returns.

“I would have guessed, given all the economic problems over there, that the European stock market would have run into more trouble,” said Robert C. Doll, chief equity strategist at BlackRock, the investment manager.

If individual investors are considering reducing their exposure to Europe, they should first weigh making smaller moves that can reduce risk without upsetting their overall asset allocation plans, strategists say.

“Our take is that you have to have money in Europe,” said Lewis J. Altfest, chief investment officer at Altfest Personal Wealth Management, “but you can focus on certain areas of Europe that are healthier.”

Mr. Altfest noted, for instance, that Germany’s economy has been stronger than most, and that it has avoided the debt worries plaguing nations like Greece, Ireland, Italy, Portugal and Spain.

What’s more, he said German companies might actually benefit from the crisis if fear of potential defaults by such countries leads to a weaker currency. “A cheaper euro means a more competitive Germany when it comes to trade outside of Europe,” he said, noting that a falling currency would make German exports cheaper for foreign customers.

Mr. Altfest said investors could move a small portion of their holdings in a broad-based European stock fund to a fund that tracks only the German market. The iShares MSCI Germany Index fund, for instance, has returned nearly 10 percent so far this year, based in dollars.

Alec Young, international equity strategist at S. P. Equity Research, has been recommending a “surgical approach” to European exposure. He said, for instance, that investors should avoid bank shares.

About 23 percent of Europe’s market capitalization is in financial stocks — a sector whose companies own European sovereign debt and are thus vulnerable in the event of defaults. Shares of Banco Popolare of Italy and Commerzbank of Germany, for example, have lost about half their value this year.

But investors can reduce their exposure to European financials by turning to professionally managed mutual funds that underweight the sector relative to the broad market, he said.

Mr. Young also recommends an emphasis on dividend-paying European stocks, because it’s unclear whether American investors can keep counting on a currency boost on their investments. Without that boost, he said, European stock returns may be flat, so having a dividend strategy could provide some gains.

FINALLY, focusing on shares of high-quality multinational companies could offer an added level of safety for European portfolios, said Charles de Vaulx, a portfolio manager at International Value Advisers.

Mr. de Vaulx says he hasn’t had to trim his portfolio’s European stake because so many of his holdings are globally oriented companies whose growth is tied to consumers outside the region.

“Many stocks in Europe have little do with Greece,” he said.

For example, the British spirit maker Diageo, whose brands include Guinness and Johnnie Walker, sells products in about 180 countries. And the food and beverage giant Nestlé, based in Switzerland, generates nearly 40 percent of its sales from emerging markets.

Simon Hallett, chief investment officer at Harding Loevner, an asset management firm, agrees with this approach. “We tend to own companies in Europe that are very multinational and that aren’t reliant on their domestic markets,” he said.

As a result, he said, “we don’t think it makes any sense to change our strategy.”

Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.

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Why We Deregulated the Banks

July 30, 2011 by Leave a Comment

Jeff Madrick’s “Age of Greed” almost seems to have set out to be the economic equivalent of Mann’s history. Writing against the backdrop of the 2007-9 financial crisis, Madrick, the author of “The End of Affluence,” also starts his story in the 1970s, tracing the regulatory and cultural changes that led to our current trouble. In Madrick’s telling, a cabal of conservatives, driven first by greed and second by “extreme free-market ideology,” gradually seized power. The result, as proclaimed in his bold subtitle, was “the triumph of finance and the decline of America.”

It’s clear from the outset that Madrick has his work cut out for him. Where Mann’s story concentrated on six individuals who held office through successive Republican administrations, Madrick draws in a far wider cast of characters: thinkers like Milton Friedman; business leaders like Jack Welch; presidents like Richard Nixon and Ronald Reagan. It’s not always obvious what connects these disparate figures, so the book jumps from pen portrait to pen portrait without always advancing its main theme.

And the theme itself is slippery. A history of neoconservatism can home in on self-professed neocons, whose actions are clearly informed by a defined body of beliefs. But it’s harder to identify a cabal that self-consciously embraced greed as a guiding philosophy. To be sure, the insider trader Ivan Boesky once defended greed at a forum in Berkeley, Calif. But an undertow of avarice is surely a human constant. Was Sandy Weill, the Wall Street executive who retained a corporate jet while slashing retired employees’ health insurance, really so very different from a 19th-century Rockefeller or Vanderbilt?

If the greed of Boesky or Weill is unsurprising, the lack of greed evinced by some of Madrick’s characters is striking. Paul Volcker, the Fed chairman whom Madrick eccentrically berates for his determined fight against inflation, was known to be frugal; John Reed, Citigroup’s boss during the 1990s, was by Madrick’s own account “thoughtful and unflashy.” Reagan himself was more enthusiastic about self-reliance and hard work than about material advancement, remarking that “free enterprise is not a hunting license.” Early in his career, Walter Wriston, Reed’s predecessor at Citi and perhaps the character whom Madrick conjures most successfully, was offered a salary of $1 million to move to Monaco and work for Aristotle Onassis. He chose to remain in a middle-income housing project in Stuyvesant Village.

If “Age of Greed” is an unhelpful label, what of Madrick’s secondary contention — that the era was defined by extreme free-market ideology? Well, the extreme was pretty mainstream. Free-market ideas were embraced by Democrats almost as much as by Republicans. Jimmy Carter initiated the big push toward deregulation, generally with the support of his party in Congress. Bill Clinton presided over the growth of the loosely supervised shadow financial system and the repeal of Depression-era restrictions on commercial banks. Centrist intellectuals like Lawrence Summers, who was fully aware of market failures — indeed, who had emphasized them in his academic writings — nonetheless embraced pro-market public policies because, he thought, they were more right than not.

Besides, free-market policies were never embraced with the unqualified enthusiasm that some imagine. Throughout Madrick’s period, entitlement spending grew and armies of supervisors at multiple agencies tried to keep the financial sector in check. Contrary to Madrick’s view that the regulators were always retreating, the 1980s saw the imposition of new capital-adequacy rules on banks, and the 2000s brought the passage of the ambitious ­Sarbanes-Oxley accounting reforms. These regulatory efforts proved hard to enforce, but the record hardly supports Madrick’s argument that policy was captured by free-market extremists.

Sebastian Mallaby, the Paul A. Volcker senior fellow at the Council on Foreign Relations, is the author of “More Money Than God: Hedge Funds and the Making of a New Elite.”

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Economic View: What’s With All the Bernanke Bashing?

July 30, 2011 by Leave a Comment

He left a comfortable professorship at Princeton to run the Federal Reserve — and this is what he gets.

Mr. Bernanke has worked tirelessly to shepherd the economy through the worst financial crisis since the Great Depression, and yet, for all his efforts, seems vastly underappreciated.

CNBC recently asked people, “Do you have confidence in the way Ben Bernanke is handling the economy?” Ninety-five percent of the respondents said no.

Yes, the CNBC survey was hardly scientific. Nonetheless, it reflected the deep unease that many Americans feel about our central bank and its policies. Critics on both the left and right see much to dislike in how Mr. Bernanke and his Fed colleagues have been doing their jobs.

Let’s review the complaints.

Critics on the left look at the depth of the recent recession and the meager economic recovery we are experiencing and argue that the Fed should have done more. They fear that the United States might slip into a long malaise akin to Japan’s lost decade, in which unemployment remains high and the risks of deflation deter people from borrowing, investing and returning the economy to its potential.

Critics on the right, meanwhile, worry that the Fed has increased the nation’s monetary base at a historically unprecedented pace while keeping interest rates near zero — an approach that they say will eventually ignite inflation. Some in this camp have gone so far as to propose repealing the Fed’s dual mandate of simultaneously maintaining price stability — that is, holding inflation at bay — while maximizing sustainable employment. Better, these people say, to replace those twin goals with a single-minded focus on inflation.

Yet Mr. Bernanke’s record shows that the fears of both sides have been exaggerated.

Mr. Bernanke became the Fed chairman in February 2006. Since then, the inflation measure favored by the Fed — the price index for personal consumption, excluding food and energy — has averaged 1.9 percent, annualized. A broader price index that includes food and energy has averaged 2.1 percent.

Either way, the outcome is remarkably close to the Fed’s unofficial inflation target of 2 percent. So, despite the economic turmoil of the last five years, the Fed has kept inflation on track.

Of course, this record could come undone in future years. Yet the signals in the financial markets are reassuring. The interest rate on a 10-year Treasury bond, for instance, is now about 2.8 percent. A 10-year inflation-protected Treasury bond yields about 0.4 percent.

The difference between those yields, the so-called “break-even inflation rate,” is the inflation rate at which the two bonds earn the same return. That figure is now a bit over 2 percent, a sign that the market does not expect inflation in the coming decade to differ much from that experienced over the last five years. Inflation expectations are anchored at close to their target rate.

Could the Fed have done substantially more to avoid the recession and promote recovery? Probably not. The Fed used its main weapon against recession — cuts in short-term interest rates — aggressively as the depth of the downturn became apparent. And it turned to various unconventional weapons as well, including two rounds of quantitative easing — essentially buying bonds — in an attempt to lower long-term interest rates.

A few economists have argued, with some logic, that the employment picture would be brighter if the Fed raised its target for inflation above 2 percent. They say higher expected inflation would lower real interest rates, thus encouraging borrowing. That, in turn, would expand the aggregate demand for goods and services. With more demand for their products, companies would increase hiring.

Even if that were true, a higher inflation target is a political nonstarter. Economists are divided about whether a higher target makes sense, and the public would likely oppose a more rapidly rising cost of living. If Chairman Bernanke ever suggested increasing inflation to, say, 4 percent, he would quickly return to being Professor Bernanke.

What the Fed could do, however, is codify its projected price path of 2 percent. That is, the Fed could announce that, hereafter, it would aim for a price level that rises 2 percent a year. And it would promise to pursue policies to get back to the target price path if shocks to the economy ever pushed the actual price level away from it.

Such an announcement could help mollify critics on both the left and right. If we started to see the Japanese-style deflation that the left fears, the Fed would maintain a loose monetary policy and even allow a bit of extra inflation to make up for past tracking errors. If we faced the high inflation that worries the right, the Fed would be committed to raising interest rates aggressively to bring inflation back on target.

MORE important, an announced target path for inflation would add more certainty to the economy. Americans planning their retirement would have a better sense about the cost of living a decade or two hence. Companies borrowing in the bond market could more accurately pin down the real cost of financing their investment projects.

Mr. Bernanke cannot remove all of the uncertainty that households and businesses face, but he can eliminate one small piece of it. Less uncertainty would, other things being equal, encourage spending and promote more rapid recovery. It might even raise Mr. Bernanke’s approval ratings a bit.

N. Gregory Mankiw is a professor of economics at Harvard. He is advising Mitt Romney, the former governor of Massachusetts, in the campaign for the Republican presidential nomination.

Article source: http://feeds.nytimes.com/click.phdo?i=43be0c53fa728a9b66e51c9db374af37

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Taking a Closer Look at the Result of a Credit Downgrade

July 30, 2011 by Leave a Comment

A downgrade to the nation’s credit would probably increase the cost of borrowing for the federal government and for everyone else. But the Obama administration, House Republicans, some economists and Wall Street strategists have concluded that the economic impact would be surprisingly modest, one reason that negotiations over a “grand bargain” for debt reduction broke down.

The plans being debated instead by House Republicans and Senate Democrats would not reduce the federal debt to a level that most economists regard as manageable, and it seems likely that further efforts will await the results of the 2012 elections.

A compromise between the parties would avert the catastrophic consequences of default, but even if Congress agrees to pay its bills, one of the three credit rating agencies, Standard Poor’s, has said it may remove the United States from its list of risk-free borrowers.

“A downgrade has lots of downsides, but they’re minor in comparison to not raising the debt ceiling on time, so I think the focus is correct at this point,” said Mark Zandi, chief economist at Moody’s Analytics, a sister company to the rating agency that rates debt securities.

“What’s most important is raising the debt ceiling. That’s the minimum that they need to do to make sure the recovery in fact remains a recovery.”

Asked Thursday whether his plan would avoid a downgrade, House Speaker John A. Boehner said, “That is beyond my control.” He said the legislation, which the House passed Friday on a party-line vote, is “as large a step as we’re able to take at this point in time.”

President Obama warned Friday morning that the government was at risk of a downgrade, “Not because we didn’t have the capacity to pay our bills — we do — but because we didn’t have a AAA political system to match our AAA credit rating.” But administration officials say that the White House also regards the issue a secondary concern.

Earlier this month, there was widespread alarm in Washington when S P, followed by Moody’s and Fitch, another credit rating concern, warned that the soaring federal debt, and the political standoff over raising the debt ceiling, had placed the nation’s credit rating at risk.

The federal government makes about $250 billion in interest payments a year. Even a small increase in the rates demanded by investors in United States debt could add tens of billions of dollars to those payments. And the credit rating agencies have said other downgrades would follow like dominoes.

For example, Fannie Mae and Freddie Mac, the huge mortgage companies that are backed by the federal government, would be downgraded, raising rates on home mortgage loans for borrowers. Maryland and Virginia, and many local governments near Washington, their economies tied to the government, would also be downgraded. So would New Mexico, because an unusually high proportion of residents depend on federal benefits.

“A default on our nation’s obligations, or a downgrade of America’s credit rating,” 13 financial company chief executives said on Thursday in a letter to the president and Congress, “would be a tremendous blow to business and investor confidence — raising interest rates for everyone who borrows, undermining the value of the dollar, and roiling stock and bond markets — and, therefore, dramatically worsening our nation’s already difficult economic circumstances.”

Still, Washington’s fears of a downgrade have eased for several reasons.

Standard Poor’s warned that it might downgrade the United States in the next three months if the government did not agree on a credible plan to reduce its debts by about $4 trillion — the number used in the talks between Mr. Obama and Mr. Boehner.

But the other two agencies, Moody’s and Fitch, have shown greater patience, saying that progress toward paying down debts did not need to start immediately. That is significant, because a downgrade by a single rating agency matters less than a consensus. Investment managers, for example, may not be required to divest holdings like Treasury securities if they are downgraded only by S P.

Moody’s said on Friday that it would maintain its Aaa rating for the United States so long as the Treasury keeps paying bondholders and Congress passes a long-term deal to extend the debt ceiling. The announcement said that failure to act by Tuesday night, or to meet other obligations, including Social Security payments, would not prompt a downgrade.

Article source: http://feeds.nytimes.com/click.phdo?i=ba9e2a3a99a3f2d975374637dc42bb5e

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Essay: Coming Soon: ‘Invasion of the Walking Debt’

July 30, 2011 by Leave a Comment

During, say, zombie movies, we Americans identify with that tough guy on horseback — the survivor with the Stetson and the rifle. It’s always the other guy, that poor sap sitting next to us, we think, who would become the half-eaten corpse.

Which, weirdly, just might explain the recent fascination with how bad things could become for the economy if the United States lost its triple-A credit rating.

Wall Street is worried that America’s gilt-edged rating will slip away. Maybe not today. Maybe not tomorrow. But a reckoning, many economists say, will come, given the nation’s staggering debts and dysfunctional politics. The possible repercussions include an even bigger budget deficit and higher borrowing costs for the government, businesses and consumers.

Just how far the shockwaves might travel is uncertain. So speculating about what an economic apocalypse might look like has become fashionable in both financial and political circles. Of course, for the millions of Americans who are out of work — some for years now — Armageddon is already here. Maybe a little hellfire — if homeowners’ insurance will cover it — is what we need to fix the mess.

But there is nothing so bad that it can’t get worse. And so last year, to great fanfare, “When Money Dies: Germany in the 1920s and the Nightmare of Deficit Spending, Devaluation and Hyperinflation,” first published in 1975, was reissued and found a cult following inside the Beltway and among hedge funds.

In “Zone One,” a forthcoming novel by the Pulitzer Prize finalist Colson Whitehead, a virus turns most of humanity into flesh-eating crazies; the narrator hunts stragglers around Wall Street. In “The Walking Dead,” the hit television series set in a zombie-infested America, an image of Atlanta’s abandoned financial district conjured an end-of-world vibe. Nothing says apocalypse, apparently, like a city without functioning A.T.M.’s.

But for all of our serious economic problems — persistent high unemployment, spreading home foreclosures, the risks that bad policy, bad luck or both will send the economy back into recession — the United States of 2011 is nowhere near as bad as, say, the Vienna of 1918.

“When Money Dies” charts the travails of people like Anna Eisenmenger, who bartered her dead husband’s gold watch for potatoes, watched her malnourished grandson develop scurvy and saw neighbors attack mounted policemen so they could slaughter and eat the horses. Next to the Weimar Republic, higher interest rates on credit cards — a likely outcome of the current debt bickering — seem tolerable.

Indeed, Raghuram G. Rajan, an economist at the University of Chicago, argues that even if the United States were to default on its debt briefly, the world would mostly keep calm and carry on. Americans’ lives probably wouldn’t change markedly, he says. The more troubling and longer-lasting issue would be the United States’ loss of credibility among investors and overseas sovereign wealth funds.

“A failure to compromise sends a signal to the world that U.S. politicians can’t get their act together, and this nation might not be the best choice for guiding the international economy,” Mr. Rajan says. “The real risk is that investors will start looking for another country as the world’s financial standard-bearer.”

Which raises the troubling possibility that what is happening now could stretch on for years. People could remain out of work, businesses could be starved of capital and politics could impede a lasting economic recovery.

At least killing zombies feels like a job.

Debt troubles have come and gone in this country, and not only on Capitol Hill. In the 1970s, New York City defaulted on its debt, and yes, the consequences were painful. Enrollment plummeted at City University campuses, which until then had offered free education. Seven thousand police officers were laid off. Crime skyrocketed. Services for the poor disappeared.

But in the wake of that crisis, the city started changing business regulations and tax structures, setting the stage for a building boom. As blue-collar manufacturing jobs evaporated, in came white-collar jobs in finance, real estate and so on.

Out of the ashes of default, the yuppies rose — and, eventually, the banking and hedge fund classes that helped give us the late, great bubble.

On second thought, maybe we’re better off with the undead.

Article source: http://www.nytimes.com/2011/07/31/business/with-threat-of-us-credit-downgrade-visions-of-apocalypse-and-zombies.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Nation Calls Capital Mad, and It Agrees

July 30, 2011 by Leave a Comment

Mr. Andrews, 24, thanked her for her thoughts, then checked to see how long her wait time had been. “Oh, it’s actually down to 30 minutes,” he said, cheered that it was not an hour and a half. Quickly, he returned to work, where the rest of an astonishing deluge — 15,000 voice mails and 30,000 e-mails a day — cried out for his attention.

If the rest of the country thinks Washington has gone mad this summer, that is pretty much the view in this bewildered capital, too, even in Mr. Boehner’s overwhelmed call center.

Among the bar patrons at the Old Ebbitt Grill worried about stock portfolios, the tourists anxious about disability checks and the current and former policy makers stunned by Washington paralysis, the mood was described variously as one of doom, disgust and disbelief. Washington is talking of little else.

“I never saw anything like this, and I never thought I would see anything like this,” said Laurence H. Meyer, a former Federal Reserve governor who has been fielding calls to his Washington research firm, Macroeconomic Advisers, from worried hedge fund clients. “I never appreciated how dysfunctional our political system is.”

Tourists who have come from around the world to see messy American democracy in action are watching far more mess than they ever expected. “You guys are nuts,” said Joseph Eastwood, 44, a Toronto accountant who was waiting in the Capitol Visitor Center for a tour last week. “Instead of building the country, you’re destroying it.”

A German tourist standing nearby was more tactful but was nonetheless perplexed as he tried to teach his two teenage children about the scale of United States debt. “They are not quite understanding the sum of money borrowed,” said Peter Radewahn, 54, the director of a Bonn lobbying group. (The United States has about $14 trillion in debt, which is 99.5 percent of its yearly economic output. Germany has $2.85 trillion in debt, or 80 percent of its output.) Mr. Radewahn said he did not want to say more because he was a guest in America and wished to be diplomatic.

At the Washington National Zoo on Saturday, Dean Thompson, 53, a Republican and a mechanical engineer visiting from Augusta, Ga., was filled with disdain for lawmakers of both parties on Capitol Hill. “They’re playing with people’s savings is what they’re doing,” he said. “It’s like a game to them.”

Senator Charles E. Schumer, Democrat of New York, fumed on Friday that although Mr. Boehner was throwing “piece after piece of red meat to his right-wing lions” — that is, Tea Party-allied Republicans who are steadfastly opposed to raising the debt limit — they were never sated.

Of course, few could match the scorn last week of Senator John McCain, Republican of Arizona, who, quoting an editorial in The Wall Street Journal, derided the “Tea Party Hobbits.” (Senator Rand Paul of Kentucky, a Tea Party-allied Republican, later retorted, “I’d rather be a hobbit than a troll.”)

Beyond the sniping of opposing lawmakers, this legislative crisis has reached deeper into the layers of Washington, perhaps even more than the protracted debate over health care did. Much of what is occurring in Congress may be incomprehensible, but the basic issue — that the United States needs to increase the limit on its credit card or not be able to pay its bills — is understood.

“I get people stopping me around the Capitol more, asking what’s going to happen,” said Kelly O’Donnell, the Capitol Hill correspondent for NBC, who said she was averaging about four hours of sleep a night. “A lot of kids ask, which is interesting.”

One such visitor, Luke Stancil, 13, the chairman of the Teenage Republicans of Johnston County, N.C., had many questions and thoughts about the debt crisis during a trip to Washington last week. While waiting to see Mr. Paul with a group of other teenage Republicans in the Cannon House Office Building on Thursday, Luke said that although he liked conservatives affiliated with the Tea Party, he felt that in the interest of the country they should support Mr. Boehner’s bill to raise the debt ceiling.

“That’s all they have now,” he said soberly. (Mr. Boehner ended up postponing the vote because of a lack of conservative support, but a modified bill was passed on Friday before it was killed later that day in the Senate.)

Meanwhile, weighing in from Chicago was its newly elected mayor, Rahm Emanuel, Mr. Obama’s incendiary former White House chief of staff, who, had he been in his old job, would have been engaged in hand-to-hand combat on Capitol Hill.

“I just passed four bills today, so I’m very happy,” Mr. Emanuel reported. Well, what did he make of what was going on in Washington? “My basic point is, look, your country requires you to take responsibility and understand what an honest compromise is,” he said. He declined to answer a question about whether he missed the capital.

At the Old Ebbitt Grill, across the street from the Treasury Department, Cory Carlson, a 27-year-old account executive for the EMC Corporation, a technology giant, was at the bar on Thursday with friends. Asked about the chaos on Capitol Hill, Mr. Carlson said that the health of the economy depended on Congress raising the debt limit and that he was worried about his investments. “Don’t get me started,” he said.

In front of the Treasury building on Friday, Margaret McCoy, a 64-year-old Democrat visiting from Pembroke, N.C., said she was worried, too — about her government disability checks.

“I’m fed up with it, just fed up with it,” she said, referring to the battle in Congress. “If their checks were cut like they said ours might be cut, I wonder how they would feel.”

She looked toward the White House and saw a knot of demonstrators. Were they protesting the debt crisis, she wondered, a note of hope in her voice.

Actually, no. The demonstrators were celebrating a White House visit by President Alpha Condé, considered Guinea’s first democratically elected leader. (A separate Guinean group was also protesting the visit.)

The Guineans in the pro-Condé group said they were astonished by the debt crisis and the chaos on Capitol Hill. “It’s crazy, it’s just crazy,” said Noumouke Cisse, 57, a taxi driver from New Haven, Conn. “They are the world leaders, you know? We are very surprised they continue to fight each other.”

Article source: http://www.nytimes.com/2011/07/31/us/politics/31mood.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,
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