OMG WTF Federal Reserve Fact of the Day

Via Felix Salmon:

At the end of 2010, the Federal Reserve system had $2.423 trillion in assets and $2.367 trillion in liabilities, which means that the simplest measure of its total equity — assets minus liabilities — comes to $56.6 billion. The Fed also managed to earn net income of $80.9 billion in 2010. Which means that its return on assets was incredibly high at 3.3%, while its return on equity was an astonishing 143%.

I think it’s fair to say that no bank in the history of the world has ever had income of anywhere near $80 billion in one year: that’s over $700 per US household. Somehow, the Fed is making roughly $60 per household per month, and remitting that money straight to the Treasury.

Much of this is TARP, but also QE1 and QE2. On net I'll take it as a good thing that the Fed is giving billions to the Treasury, but the scale of interventions in asset markets is so large that it can't but make me nervous.

This is also another reminder that the U.S. Federal Reserve is the most powerful and important actor in the global economy, bar none. Its actions have far-reaching ramifications, and its capabilities are enormous. Sometimes that's good. Other times, probably not.

Or, it's better to say that when the Fed acts, it can help some groups quite a lot, and can devastate others.

Downgrading Islamist Terror As A Public Threat?

We should, says Dan Gardner:

Islamists? They were behind a grand total of one attack. Yes, one. Out of 294 attacks [in Europe]. In a population of half a billion people. To put that in perspective, the same number of attacks was committed by the Comite d'Action Viticole, a French group that wants to stop the importation of foreign wine.

Obviously the trend is similar in the U.S. We've just had an act of domestic terrorism that (apparently) had nothing to do with Islam. And despite several feeble, failed attempts, we've had almost zero attacks from Islamist groups in nearly a decade. This does not match with the rhetoric we often here.

Gardner also gets a good one in on Mark Steyn:

But half a decade has passed since Steyn declared the outbreak of the "Eurabian civil war."

And yet, there are no waves of bombings. No armies of bug-eyed jihadis. No pale-faced boat people bobbing about the North Atlantic in rusty scows. ...

Mark Steyn has a new book in the works, apparently. Something to do with the end of civilization. Given his track record, this is grounds for optimism.

Contrast that with the ongoing drug wars in Latin America. Twenty-seven people were killed in Acapulco just yesterday, including fourteen beheadings. Since 2006, there have been more than 30,000 drug killings in Mexico alone. And of course that doesn't include other countries where illicit drug activity is high, especially Columbia.

As for ETA... they've officially laid down their arms.

Obviously many more people die from Islamist groups in the Middle East and Asia than in the Americas or Europe, but that fact does not bode well for "clash of civilizations" hypotheses like Steyn's.

The point is not to minimize real threats, or to ignore problems of assimilation in Europe (and the U.S.). The point is to have a more realistic understanding of what's going on. Despite many warnings, a wave of Islamist violence has just not infected the West.

#1. Again.

Today is the first day of class (unless we get snowed in), so here's a nice reminder for students and staff:

Kiplinger’s Personal Finance magazine ranks UNC-Chapel Hill the best value in American public higher education for a “remarkable” 10th time in a row.

Kiplinger’s started ranking the best values in public universities in 1998; Carolina has been number-one every time. The ranking appears in the magazine’s February issue.

Kiplinger’s editors say their top 100 public campuses deliver “a stellar education at an affordable price.”

More at the link.

Sunday Links

A few things I've found interesting lately, but don't have time to properly blog:

-- Trying to understand the crisis, with Ed Glaeser, Daron Acemoglu, and Ragu Rajan.

-- Turkey's audacious "post modern" monetary policy.

-- China's growing problems. (ht: Drezner)

-- IMF: 2011 "pivotal year" for global cooperation.

-- Eichengreen: will "exorbitant privilege" continue?

-- Bhagwati: we need to think more carefully about corruption.

Moral Hazard and the Coming Chinese Banking Crisis

From the new FT Tilt:

Though the fund raising activities of China's biggest banks and lenders may seem like standard procedure on the surface, they are more desperate for cash than some might think, just as the country's banking regulator moves to impose stricter capital requirements.

After embarking on an excessive lending spree in recent years, the banks have no choice but to raise cash as they prepare for a wave of bad loans, many of which are exposed to the property sector, according to Gary Liu, a deputy director at China-Europe International Business School (CEIBS) in Shanghai. ...

China's banking regulator has urged banks to reduce excessive lending to local governments, but Chinese banks still lent about the same amount in both 2010 and 2009. Local government infrastructure projects will require up to Rmb4,000bn in new loans next year, according to BNP Paribas estimates cited in the FT. ...

Bank of China's capital adequacy ratio dropped from 13.59 per cent in 2006 to 11.14 per cent by the end of 2009, according to Liu. According to the Basel Accord, the core capital adequacy should be above 8 per cent.

"The ratio is close to dangerous level. Bank of China's target ratio is no less than 11.5 per cent, so the rights issue is a must," Liu said.

But state-run banks, knowing they that any risk to the bank will be absorbed by the central government, will not be motivated to curb risky lending, said Wilson Li, a Shanghai-based analyst at Guotai Junan Securities, told FT Tilt.

Quote of the Day

M.S.:

What you're seeing in that divergence between the nominal rate corporations are supposed to pay, and the rate they actually pay after loopholes and gimmicks, is institutionalised clientilism and favouritism. In many other countries, the same phenomenon is expressed as corruption, but in America and other advanced economies it's incorporated into the tax code so as to fan away the stench. The problem with trying to get rid of clientilism is that it tends to be supported by the clients.

Social Science Journalism

The lesson of history is that, in the long run, super-elites have two ways to survive: by suppressing dissent or by sharing their wealth. It is obvious which of these would be the better outcome for America, and the world. Let us hope the plutocrats aren’t already too isolated to recognize this.

That is Chrystia Freeland in The Atlantic, summarizing Daron Acemoglu and James Robinson's Economic Origins of Dictatorship and Democracy without realizing it. The whole article is very good.

Trivia of the Day

This, from KPC, is well-known to me and I reiterate it to my students every semester. But it's worth a reminder:

China ... USA

1. Which country has the largest amount of manufacturing, by value, in the world?
2. Which country lost the most manufacturing jobs, gross, between 1990 and 2005?

The answers surprise people who know nothing about economics. The answer to 1 is "USA," by a lot.

The answer to 2 is China, again by a lot.

Munger's claim that China has lost the most manufacturing jobs is a bit misleading. The key word is "gross". They've also created quite a lot of manufacturing jobs, and on net the number is positive. In the U.S. the net number (in manufacturing) is negative. But he's right that there's been a lot creative destruction going on, and most Americans only see one side of the story. It also true that the U.S. produces a lot more than we used to, with a lot less labor. That's a good thing, although it may contribute to the rise of structural inequality I discussed below.

A Schumpeterian Take on Our Macroeconomy

What is the likelihood that this from Tyler Cowen and Jayme Lemke is true:

In essence, we have seen the rise of a large class of "zero marginal product workers," to coin a term. Their productivity may not be literally zero, but it is lower than the cost of training, employing, and insuring them. That is why labor is hurting but capital is doing fine; dumping these employees is tough for the workers themselves -- and arguably bad for society at large -- but it simply doesn't damage profits much. It's a cold, hard reality, and one that we will have to deal with, one way or another. ...

In other words, the U.S. economy is going through some major structural shifts. It's not a question of getting back to where we were, but rather that the economy must solve a new problem of re-employing a lot of people who were not, in reality, producing very much in the first place. That's a steeper challenge than we had realized early in the stages of this recession -- and so far policymakers have failed at meeting it.

It's impossible to know for sure of course, but I'd put the number at at least 50%. Note that this is a Schumpeterian view of this recession, much maligned by Keynesians but that contains an internal logic, in which a period of "purging" and reorganization of the economy is required for full recovery*. If true, it begs questions: do all recessions have similar underlying causes? If not, is there a standard policy playbook that can be applied at all times?

I don't agree with the title and one of the conclusions: 10% unemployment is unlikely to be the new normal. Even the liquidationists and Schumpeterians thought that once the purging was over the economy would adjust. Maybe that takes 5 years or 10, but in the grand scheme of things that's not forever.

In terms of politics, it seems clear to me that the U.S. is being fragmented in many more ways than just divergences in income. Capital has recovered from the recession, and business income and profits are now very high. Skilled labor never suffered all that much (in terms of employment, if not loss of financial wealth), and the unemployment rate for those with college degrees is now below 5%. For those with postgraduate degrees it's under 3%. Almost the entire brunt of the recession has been felt by those with less education and fewer skills. It's not just income inequality -- as The Economist noted in a much-discussed recent article, PhDs often don't make a lot of money -- but also inequality of job stability or perhaps mobility.

What does this sum up to, politically? It leads me to think that college education should be much more accessible (at lower cost) than it currently is. This could include vocational schools, but we should encourage broader educations more. In primary and secondary schools we should definitely emphasize teaching skills that are broadly applicable, like mathematics, rather than just teaching facts and knowledge. It makes me think that we should reduce or eliminate programs that encourage home ownership for everyone, including the mortgage interest deduction, and promote mobility in other ways**. We should definitely cut payroll taxes (as the recent tax compromise finally does), or even better eliminate them entirely. Replace them with a VAT or higher marginal income rates if necessary.

I'm sure the Keynesians will rebut this over the coming days, but right now the recession only exists for less-skilled labor, not for capital or high-skilled labor. It's been that way for some time. If that's not a structural recession than I'm not sure what would be.

*Schumpeter put it thus: "Depressions are not simply evils, which we might attempt to suppress, but forms of something which has to be done, namely, adjustment to change."

**Krugman and others say that structural factors are not important because there is not a deficit of labor in any sectors, while there is a surplus in most. But structure could be about location rather than just industry. Clearly too many people live in Detroit. Probably too few live in Bismark.

UPDATE: Finally getting around to reading Chrystia Freeland's profile of the nouveau riche in The Atlantic, and it opens with this from Alan Greenspan:

IF YOU HAPPENED to be watching NBC on the first Sunday morning in August last summer, you would have seen something curious. There, on the set of Meet the Press, the host, David Gregory, was interviewing a guest who made a forceful case that the U.S. economy had become “very distorted.” In the wake of the recession, this guest explained, high-income individuals, large banks, and major corporations had experienced a “significant recovery”; the rest of the economy, by contrast—including small businesses and “a very significant amount of the labor force”—was stuck and still struggling. What we were seeing, he argued, was not a single economy at all, but rather “fundamentally two separate types of economy,” increasingly distinct and divergent.

Chart of the Day

We are rightly concerned about the economic doldrums in the U.S. and Europe, but we shouldn't forget that elsewhere progress marches on. Via the Economist, which adds:

MUCH has been written about the rise of the BRICs and Asia’s impressive economic performance. But an analysis by The Economist finds that over the ten years to 2010, six of the world’s ten fastest-growing economies were in sub-Saharan Africa. On IMF forecasts Africa will grab seven of the top ten places over the next five years (our ranking excludes countries with a population of less than 10m as well as Iraq and Afghanistan, which could both rebound strongly in the years ahead). Over the past decade the simple unweighted average of countries’ growth rates was virtually identical in Africa and Asia. Over the next five years Africa is likely to take the lead. In other words, the average African economy will outpace its Asian counterpart.