QUOTE OF THE DAY
Reuters: Detroit’s derivatives slip through the net
If you were thinking of buying some of the city of Detroit’s bonds, you might want to tread lightly. Although the city was able to come to terms with the state and avoid the appointment of an emergency manager, it still faces enormous challenges. The biggest threat to Detroit’s fiscal stability is the risk that its derivatives counterparties will activate triggers in their interest rate swaps. If this happens, the counterparties will force a lump-sum payment, draining cash from an already shaky situation.
From the outside it’s difficult to know exactly what is happening in the city. A recent Moody’s report says that counterparties may have already activated these triggers, but it’s impossible to get any public information from the city. There is a big regulatory gap or loophole that shields Detroit from having to tell investors, or their citizens, the status of these derivatives contracts.
Here is how I described the situation facing Detroit on Mar. 24:
Detroit has about $3.8 billion in interest-rate swaps outstanding, according to its most recent public filing (CAFR of June 30, 2011, page 113). These Wall Street weapons of mass destruction were sold to the city in a series of transactions since 1997, allegedly to hedge interest-rate risk….
Detroit’s derivatives could blow up the city because many contain “termination” clauses that require accelerated payments to the dealer on the other side of the transaction. The terms vary by contract, and public documents don’t give us much detail. But if the credit rating of Detroit or its bond insurers (MBIA and Assured) falls below a certain level, then an accelerated lump-sum payment must be made to the dealer…. It’s a dangerous standoff, and we don’t know how to decipher the situation, since the information is not publicly disclosed.
Forbes: Obama's Minimum Wage Hike: A Case Of Zombie Economics
President Obama’s proposal to increase the federal minimum wage is a case of what Nobel laureate economist Paul Krugman calls “zombie economic ideas.” According to Krugman, “a zombie idea is a proposition that has been thoroughly refuted by analysis and evidence, and should be dead—but won’t stay dead because it serves a political purpose, appeals to prejudices, or both.” In his New York Times column,“Rubio and the Zombies,” Krugman does not attack the minimum wage, but he should.
A fundamental law of economics—the law of demand—states that when the price of anything (including labor) increases, the quantity demanded will decrease, assuming other things affecting demand remain unchanged. In the case of labor, this means as the price of labor (the wage rate) increases, the number of jobs will decrease, other things constant. Moreover, the decrease in employment will be greater in the long run than in the short run, as employers shift to labor-saving methods of production.
Of course, other things seldom stay constant in the real world, so the law of demand is sometimes difficult to test. But just as when the wind blows a leaf upward, the law of gravity remains intact, so too with the law of demand. Public policy should be based on sound economics, not on politically popular myths.
Numerous studies have shown that when the real minimum wage is pushed above the prevailing market wage for unskilled workers, jobs are lost and others never created. The government can promise a higher wage rate, but if a worker loses her job, her income (hourly wage x hours worked) will be zero.
President Obama is practicing zombie economics when he ignores the law of demand and promises to raise the federal minimum wage from $7.25 an hour to $9, so that “no one who works full-time should have to live in poverty.” He believes that “this single step would raise the incomes of millions of working families.” If so, why not increase the federal minimum to $100 an hour and abolish poverty?
Chicago Tribune: New pension fix proposal shot down by Quinn
A top House Democrat on Wednesday suggested a new plan to fix the state's massively indebted retirement system: Make the temporary income tax hike permanent, have state workers and teachers chip in more toward their pension and raise the retirement age for full benefits to 67.
The proposal by Rep. Lou Lang of Skokie drew criticism from Democratic Gov. Pat Quinn, who said a pension fix needs to have more reforms than simply additional tax money.
"We can't just be meandering along," Quinn said. He added that lawmakers must move quickly so the state's economy won't be "held hostage" by the current "pension cloud."
Lang said he unveiled the legislation to address the $96.8 billion pension debt now because proposed alternatives roll back benefits and fall short of being "constitutional and comprehensive." But Lang's proposal aims to fund retirement plans at 80 percent rather than 100 percent, the level Quinn and other reform proponents desire.
The governor said he met this week with allies of Senate President John Cullerton, D-Chicago, who is sponsoring a pension package that incorporates Senate and House concepts. Cullerton spokeswoman Rikeesha Phelon dismissed Lang's constitutional concerns but welcomed his bill as a potential sign of an "increased appetite for action."
The 67 percent hike in the personal income tax rate and a corporate tax increase were billed as temporary when Democrats approved it in early 2011. The tax increase is supposed to start dropping off in 2015, but Lang said lawmakers realize the state needs the money.
Daily Caller: Illinois state senator pushes anti-anonymity bill
A recently introduced bill in the Illinois state Senate would require anonymous website comment posters to reveal their identities if they want to keep their comments online.
The bill, called the Internet Posting Removal Act, is sponsored by Illinois state Sen. Ira Silverstein. It states that a “web site administrator upon request shall remove any comments posted on his or her web site by an anonymous poster unless the anonymous poster agrees to attach his or her name to the post and confirms that his or her IP address, legal name, and home address are accurate.”
The Democratic lawmaker’s bill, which does not ask for or clarify requirements from entities requesting the comment removal, would take effect 90 days after becoming law.
Pseudonymous and anonymous comments have long been a critical part of U.S. public discourse, though, and the bill may be on shaky legal ground.
The Electronic Frontier Foundation (EFF) noted on its website that the “right to anonymous speech is also protected well beyond the printed page.”
“Thus in 2002 the Supreme Court struck down a law requiring proselytizers to register their true names with the mayor’s office before going door-to-door,” wrote EFF, noting that the Supreme Court protects Internet commentary as it does pamphleteering.
The bill is part of a larger trend of lawmakers seeking to censor anonymous online speech.
Forbes: Detroit Tops 2013 List Of America's Most Miserable Cities
Forbes put Detroit Mayor Dave Bing on its cover in 2011 for a story with the optimistic headline: “City of Hope.” The premise was that the city had hit rock bottom and was poised for a turnaround.
“Right now, it’s all about survival,” Bing told Forbes.
Two years later, Detroit’s problems continue to multiply, sadly. It is still dealing with high levels of violent crime and unemployment. Home prices, already at historic lows, plummeted a further 35% during the past three years to a median of $40,000 as net migration out of the city continued.
The latest blow was Tuesday’s announcement that the city is on the verge of being taken over by the state. Detroit is in a financial emergency and cannot pay its bills. The city has been issuing debt to fund day-to-day operations. The continuing problems propelled Detroit to the top spot in our 2013 ranking of America’s Most Miserable Cities.
Economist Arthur Okun developed the original Misery Index in the 1960s. It combines unemployment and inflation (and was 10.2 last year nationally, down from an 18-year high of 12.1 in 2011).
Our look at misery is more localized, and includes unemployment, as well as other things that aggravate people.
WSJ: Young Adults Are Shedding Debt Faster Than Older People
Young adults are cutting debt faster than older people and are less in hock to creditors than a decade ago–despite the ballooning of student loans, a new study shows.
Between 2001 and 2010, young households—defined as those headed by someone younger than 35—have generally reduced their indebtedness while older households have increased it, according to a report by the Pew Research Center released Thursday. Some 56% of young households saw either a decline or stabilization in their overall debt load in the period, with only one type of debt—student loans—rising as a share of total debt. By contrast, older households tended to have more non-property-related debt than before, not less.
The findings reflect in part the fact that young people are delaying marriage and striking out on their own later—or living with housemates—which reduces home-buying and mortgage debt, by far the biggest source of consumer debt. The share of young households owning their main residence fell to 34% in 2011 from 40% in 2007.
However, the lower debt loads among young adults aren’t just about slowing household formation: Young people have also become less willing to take on auto- and credit-card debt. Only 39% of young households had any credit-card debt in 2010, compared with 50% in 2001. Only 66% of young households had a vehicle in 2011, while 73% did in 2007.
WSJ: A Higher Minimum Wage—but Not for Interns in Congress
President Obama called in his State of the Union for an increase in the minimum wage to $9 an hour by 2015, from $7.25, notwithstanding the evidence that it will increase unemployment among young, entry-level workers. This push by Mr. Obama and his congressional allies is especially difficult to understand because they clearly appreciate how valuable it is for young people to gain workplace experience and make connections that can lead to career opportunities.
Internships at the White House, on Capitol Hill and elsewhere in Washington introduce thousands of young people to working in government and to the discipline and industry needed to function in any workplace. Yet these unpaid positions are almost by definition reserved for the offspring of the well-to-do who are least in need of such an advantage.
Consider Barbara Boxer, the Democratic senator from California, who urged the country to "heed the president's call" to raise the minimum wage. Throughout the year, Ms. Boxer offers internships that provide "a valuable opportunity to see how a Senate office functions," according to her website. Interns are advised that they "should dress in a professional manner befitting the representative of a U.S. Senator at all times." Her interns may dress in a professional manner, but they are unpaid.
Another advocate of a higher wage floor is Sen. Al Franken (D., Minn.)—except in his congressional office. The Democrat promises that "interns will receive unique career development opportunities." But that first rung on the ladder comes with this caveat: "All internships are unpaid."
Reps. Jerrold Nadler and Charles Rangel are both Democrats from New York, and they share the same policy: "Although all internships in all offices are unpaid, students gain invaluable work experience."
Then there is Sen. Sherrod Brown (D., Ohio). "Interns in my Washington, D.C. office work on a wide range of projects," prospective applicants are told. But the young folks are on their own when it comes to expenses: "internships in my Ohio and Washington, D.C. offices are unpaid. In addition, we are unable to reimburse you for parking and mileage."
The White House also offers an internship that "is designed to mentor and cultivate today's young leaders, strengthen their understanding of the Executive Office and prepare them for future public service opportunities." The pay for these promising positions is zero.
CARTOON OF THE DAY