Debt Ceiling Dilemma

Peter Klein of the Independent Institute says that he is "a bit surprised no one has brought up William English’s 1996 AER paper, “Understanding the Costs of Sovereign Default: American State Debts in the 1840′s,” which provides very interesting evidence on US state defaults." My response is that I'm VERY SURPRISED no one has bothered to look at the data freely available on EH.NET (gathered by myself, Dick Sylla, and Jack Wilson) that shows that the prices of Pennsylvania bonds (and other defaulting state bonds too) plummeted from the low 90s (par = 100) to the low 70s in just 6 weeks in early 1841. That was an era, btw, when banks did not have to mark to market and when state bonds were not an important part of the portfolios of most financial institutions. In other words, Klein is right that the default of state governments in the 1840s was not catastrophic but it was pretty bad and any significant drop in Treasury bond prices today would be much more severe.

Keep Your Student Loan Debts Under Control -- Know How: A Guest Post by Stewart Smith

Below is my first guest post. Written by Stewart Smith, the post is designed to help students to better understand and cope with their debt problems, an already large and growing problem. Readers of Fubarnomics (and Higher Education and the Common Weal in the India market) will understand why the topic appealed to me.

Keep Your Student Loan Debts under Control -- Know How

A study conducted by the National Center for Education recently stated that the student debts for the graduating class of 2011 are going to exceed the debts of the previous graduating classes. Statistics indicate students will be leaving college with at least $23,000 of debts. It will be an 8% increase from the last year record and a whopping 47% increase from the record over a decade ago. Graduates burdened with large student loan debts usually end up living with their parents longer and get married at a much later age. Why the rising costs? Some say it's the economic meltdown and post recession hangover, while others believe the cost of higher education is increasing because more people are keen to attend college and university now and there is a cutthroat competition for admission and scholarships. With no debt settlement around to help you out, student loan debts can put your finances in jeopardy in the long run. Read on to know how to deal with student loan debts and ensure a financially secure future ahead.

* Make sure you apply for federal student loans to pay tuition fees rather than seeking private loans with high interest. Federal loans have relatively lower interest rates than private ones and their repayment plans can save you big bucks, because you do not accrue interest while you are in school. Most private loan lenders have hidden rules that cause you to pay more fees in the long run if you don't read the fine print carefully.

*Attempt to understand the amount and type of student debt that you owe clearly. Determine exactly how much you have to repay on each loan and how much you will have to pay altogether each month. To gain a deeper comprehension of your financial obligations, visit http://www.projectonstudentdebt.org.

*Once you know the amount and type of debt you owe, request the lenders to prolong your repayment duration, if possible. This will enable you to make smaller payments right after school when you are hunting for jobs or as a fresher making less money. It's true that extended payment plans will cause more interest to accrue in the long run but the interest will be tax-deductible within certain limits.

*You can opt for an income-based repayment plan as well. Under this payment plan your monthly payment amount is limited to a specific percentage (depending on the lender) of your discretionary income each month. This certainly helps you to keep current on your payments more easily.

*During a period of unemployment if you are simply unable to make payments, request a forbearance or deferral on your loans. This will temporarily suspend your payments and give you enough time to discuss the repayment procedure with the lenders.

Last but not the least, check your budget, embrace frugal living, curtail entertainment cost, take a part time job and make sure you do not end up incurring a six-figure amount of student loan debts. If you have to spend three to four years focusing on reducing your balance, there will be a delay in achieving your primary goals of life like marriage or buying a home.

Mismanagement of the Buffalo Marriott Niagara on Millersport Highway

The general manager of the Buffalo Marriott (the one on Millersport Highway near SUNY Buffalo's Amherst campus) needs to go to hotel school or something because he is running a wreck.

Here are the facts:

1) His front desk staff quoted my family and I $140 (per room, per night) but charged us $180 without verifying the charge. Worse, they did this on a LATE NIGHT check-in. I did not discover the over-bill until it was too late. I cannot prove that the hotel regularly takes advantage of weary travelers but it certainly did in this case.
2) The manager's staff did not advise us that the hotel was doing construction on our floor or that the hot tub was out of order. They also promised to send around a luggage cart but never did, forcing me to walk through the construction zone to retrieve it myself.
3) Two huge spiders and webs awaited us at the exit door upon our departure at 11 am the next morning. I have spent maybe 1,000 nights in hotels during my lifetime and do not recall seeing any spiders, even in cheap-o hunting lodges much less ones charging almost 2 bills a night in backwater Buffalo!
4) The room appearance and smell, TV, bathroom etc. were no better than $100/night hotels and my room was considerably noisier than most, perhaps due to the undisclosed construction activity.
5) When I called the GM to advise him of the dreadful experience we had, he:
a) got back to me some 24 hours later without researching my complaints;
b) acted very defensively and twisted everything I said;
c) refused to offer ANY compensation for our troubles.

Facts 1-3 could have been a string of bad luck, as the GM weakly claimed, but there is no excuse for 5 and I suspect 1-3 would not have occurred under better management. 4 is simply the state of the hotel and should be sufficient to prevent any but the most desperate souls from staying at the Buffalo Marriott Niagara on Millersport Highway in Amherst, NY (near SUNY Buffalo), even if management improves.

And one last thing: the website describes the hotel as "minutes away" from Niagara Falls but that is disingenuous as it suggests that most people would measure the time in minutes (say, 5 or 10) instead of fractions of an hour (half to three quarters depending on traffic unless you want to risk a speeding ticket on Grand Island).

Self-Regulation of Hedge Funds

Hedge Fund Group is paying me a small stipend to blog about its Certified Hedge Fund Professional (CHP) designation. That's great because probably I would have done it for free! Here's why:

1) I believe that Americans have come to rely far too much on the government to solve (or more usually attempt to look like solving) problems that it is not designed to address, much less fix. Seriously, how can 100 Senators and a couple of hundred Reps, the vast majority of whom know little to nothing about finance, let alone an ever-changing beast as complex as the hedge fund industry, create effective regulatory legislation? The odds of success are vanishingly small.

2) The U.S. financial industry has a long history of successful self-regulation. I'm not kidding! The NYSE is probably the most famous of the many SROs (self-regulating organizations) that, though not without occasional lapses, have prevented the sort of investor expropriation that has short-circuited the development of numerous economies in Latin America, Africa, Central Asia, etc. Professional designations such as CPA, CFP, CFA, and so forth are part of the SRO apparatus because of the knowledge and technical expertise that holders must demonstrate, usually on rigorous blindly scored examinations, before becoming certified. During the healthcare/insurance debate of 2009-10, many Americans were outraged at the suggestion that government bureaucrats might replace the American Medical Association (AMA), the medical community's major SRO. They should also bristle at any attempt to weaken financial SROs and in fact should encourage pro-SRO legislation.

3) The CHP appears to be a worthy attempt to help hedge fund managers to self-regulate. Started in 2007 in Boston by experienced risk management expert Richard Wilson, HFG now has over 20,000 members because its CHP caters specifically to hedge fund professionals. To meet the needs of those professionals, HFG is growing quickly and also expanding its training programs and videos and will probably continue doing so in the future as its forebears in banking, insurance, and personal investing did. There is a demand for good people in every industry and HFG is doing a great job increasing the supply, both by increasing the knowledge of people in the industry and by allowing those with its designation to signal their knowledge more effectively to hedge fund managers.

4) Getting CHP designation empowers job applicants to land the positions they want, helps hedge funds to hire the best and the brightest, and, I believe, promotes financial sector stability. Many hedge fund strategies entail taking large amounts of risk. Although much of that risk is so-called "tail risk" (i.e., highly unlikely to occur), individual hedge funds and even entire hedge fund sectors could fail, roiling financial markets (e.g., your 401K). Government cannot really stop people from taking risks (look at the miserable job it has done eliminating pot, crack, murder, rape, and risky banks) but the hedge fund industry itself can minimize the risks and collateral damage by ensuring that the people working in the industry are as intelligent and well-trained as possible. One great signal of those attributes, and perhaps the best currently available, is CHP designation. So if you are in the hedge fund biz, know someone who is, or just want to help keep government waste in check, read this FAQ.

Bad Financial Advice

AccountingDegree.Com recently posted "10 Financial Gurus Who've Given Terrible Advice," a short piece that nails almost all the biggies for providing the masses with advice ranging from silly (buy a commode instead of a toilet) to expensive (buy stocks! in 2001, 2007-8, etc.). Simon Constable (my co-author on The WSJ Guide to the 50 Economic Indicators That Really Matter, out since May and doing pretty darn well) and myself are not mentioned, perhaps because our book is too new but, more fundamentally, because we offer a different type of product. Instead of pretending we are gurus with special information or knowledge that we deign to share with the average American, we take the role of teachers, carefully explaining how investors can learn about the economy for themselves. Ultimately, our advice is not that investors should follow blindly the advice of purported gurus but rather that they look at and understand for themselves the cues that the economy constantly spews out. The book tries to demystify the economy in general and investing in particular, thus inoculating investors against the sometimes dumb advice of Donald Trump, Bernie Madoff, Jim Kramer, and so forth.

Obama History?

The Misery Index (MI), inflation plus unemployment, suggests that the Republican candidate, whoever he or she will be, should defeat Barack Obama in next year’s election.

Politics and the economy became so thoroughly intertwined after World War II that changes in one realm began to help predict changes in the other. Most famously, changes in MI have predicted most presidential elections since Harry Truman’s victory in 1948. When MI increases during his first term, the incumbent usually loses his bid for a second term (George H. W. Bush; Jimmy Carter) unless he is a bona fide hero (Dwight Eisenhower, the architect of the defeat of Nazi Germany; George W. Bush after 9/11 but before Iraq and Afghanistan were clearly quagmires). When MI declines, the incumbent wins re-election (Richard Nixon; Ronald Reagan; Bill Clinton), unless he was essentially appointed instead of elected. (The MI fell 3.7 points under Gerald Ford, who lost to Jimmy Carter anyway.)

Since Obama became president, official MI has increased about 50 percent, from just under 8 to over 12 because inflation increased while unemployment peaked and remained stubbornly high. Some suspect that MI has risen even faster than that because government statistics may underestimate unemployment and inflation the higher those crucial macroeconomic variables become.

Fifty important economic indicators, the subject of my new book with Wall Street Journal reporter Simon Constable, suggest that the economy will remain weak and unemployment high into the foreseeable future. Inflationary pressures are also likely to increase due to the massive monetary stimulus implemented by the Federal Reserve, which moved overnight interbank lending rates to almost zero and completed two rounds of quantitative easing (money creation). The Fed could fight inflation by increasing interest rates but in the process probably would injure employment and growth. In short, it appears highly unlikely that MI will decrease below 8 before the election next fall and it may even rise further before then.

If that prognostication proves correct and postwar election patterns hold, Obama’s main hope for re-election will be to posture himself as a war hero, the mastermind of a successful counterattack against Islamic extremists. That might be a tough sell, however, for a Nobel Peace Prize recipient.

The Fatal Flaw in Citizens United v. Federal Election Commission; a Federal Council of Revision

While working on my next book, Corporation Nation: The Rise and Demise of the American Economic Juggernaut (publisher still TBD), it occurred to me that the Founders would NOT have included business corporations (or other types of corporations for that matter) in the first amendment protection of speech because the concept of ultra vires was then so ingrained in corporate law. Ultra vires held that corporations could only engage in actions that they were explicitly chartered to conduct, strictly construed. Any other action was considered a fraud upon stockholders because it was an unauthorized use of their money, even if the action was approved by duly elected directors. Ergo, the originalist argument used by SCOTUS is flawed as the founding generation could not have had in mind a corporation that could *lawfully* use its resources to influence politics. As I have pointed out in a previous post, the founders were also very concerned about corporate influence on the political process in less direct ways, e.g. lobbying and coercing votes (in an age of open voting).

We really need to think about reforming how our Constitution is interpreted. As I have recently argued in this op ed, I think that it would be unconstitutional for the federal government to purposely default on the national debt. Apparently, however, it will have to actually default before the theory could be tested! Maybe what we need is something like the Council of Revision that was in place under New York's first constitution, a body of learned jurists who must pass on the constitutionality of bills before they become law and also empowered to treat serious constitutional issues BEFORE they inflict financial losses on taxpayers.