Wednesday's Top 10: Defending economics; Mary Jo White; Chinese reverse equity mortgages; jobs or pay?; Milton Berle; Dilbert, and more

Here's my Top 10 links from around the Internet at 10:00 am today.

Bernard is on vacation this week and will be back next Wednesday with his version.

As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz.

See all previous Top 10s here.

Friday will bring the first of our guest contributors for Top 10. If you have a recommendation for someone we should approach for their curation and compilation, email me.

1. Economics is good for lots of things (really)
Yichuan Wang is pretty annoyed that some people diss economics, and seem to do it as a sport these days.

It may not be an experimental science, but he has made a pretty good case for keeping it and expanding its approaches. A recommended read:

What should be kept in mind is that, like engineering, economics is a broad discipline that covers many different fields. Just as some engineers study computers and others study nuclear reactors, some economists study taxes, other study financial markets, and still others study how psychological biases should change the design of policy. So to use the chaos in financial markets as a reason to discredit all of economics is analogous to discrediting all of engineering on the count of a Fukushima disaster. While portions of macroeconomics may be made up of smoke, mirrors, and misleading standard errors, even a brief introspection can reveal why that is not representative of economics as a whole.

2. Baby politics
Selling baby formula is becoming a very tough business in China. Their state TV is accusing Danone of bribing doctors to recommend it. Exactly why you need someone to be bribed when the state has also forced suppliers to cut prices on importated product because of huge demand is not clear to me. More from Bloomberg:

But baby formula is obviously now a political issue in China - and the many suppliers from New Zealand had better be careful. Recently another company who sent officials to investigate fraud in a due diligence case (in another industry) got arrested for breaching officials' privacy! Take care, kiwi baby formula suppliers - it's a hornets nest.

The allegations are the latest to claim doctors’ involvement in malfeasance amid China’s crackdown on corruption in the country’s $350 billion health-care market. China extended the probe to multiple drug companies and hospitals after saying it was investigating GlaxoSmithKline Plc (GSK) over claims employees used cash and sexual favors to bribe doctors and health officials to promote sales of its medicines.

Dumex made payments ranging from several hundred yuan to about 10,000 yuan ($1,634) in the various forms of “sponsorship fees” to hospital staff for product sales, according to the CCTV report, which cited interviews and documents provided by an unidentified former sales manager from the brand.

3. On a mission
When she was appointed earlier this year, incoming SEC boss Mary Jo White was given an introduction as a fearsome adversary. But few believed the hype. But if recent news reports are accurate, she may be about to get JPMorgan Chase to confess to charges over the London Whale scandal. That would be unique; big banks 'never admit', they just pay to make the case go away.

We've been disappointed before, so we shouild wait and see the terms of the final settlement. But I'm rooting for Mary Jo to pull this one off. A big monetary penalty would be good too. He next task is to jail someone (like we have done in New Zealand).

An acknowledgment of wrongdoing by the company in the London whale matter would be a high-profile win for the Securities and Exchange Commission, which under Chairman Mary Jo White has begun pushing for settlements that include such admissions.

The agreement with the SEC, the Office of the Comptroller of the Currency, the Federal Reserve and the U.K. Financial Conduct Authority is expected to be announced as early as this week, though the talks were fluid and the price tag could rise further if other regulators join in, said people familiar with the matter.

4. Dangerous consequences
Will we ever see an 'economic recovery' without rising house prices? Three cheers for Zachary Karabell at Reuters. He has a basic reminder about what caused the GFC grief. Without homeowners getting greedy, we might have used those securitisation skills more productively. Actually, I know it is more than that. CDOs were used to entice the unsuspecting into the notion that homes could be investments. Look at the back of busses today - people are still drinking the Koolaid.

Of course, the other incendary is the tax status of gains on homes, especially here in New Zealand. That's the fuel that causes the fire to burn. That's what needs extinguishing.

Homes are places where you live. They are not - and should never have been - investment vehicles. Yes, homes may gain in value and augment one’s net worth, but the reason to own a home is that it can be a cost-effective way to obtain a place to live. The minute they are seen as investments, that reality gets perverted, with dangerous consequences.

5. Trialing a bad Western idea
In 2025, China expects to have 300 million retired people (up from 194 million today). That's the equivalent of the US population! They are thinking about how to support them, and one idea they are going to trial is ... reverse equity mortgages ! As anyone who has one will know, they are a very tough master, eating away at your 'wealth effect' and they can seem oppressive when you are at the stage of life when your earning options are very limited. I don't like them, and think it is better now that they seem to have receded from the market here.

I don't think China's retired will like them any better. They could be a recipe for a very grumpy generation if they catch on there. But what do you do when you are trying to make social policy for 300 million people? You may need to use Google's translate function (I did) but here's an extract from Yicai.com:

Google Translate is a bit ropey, but you get the idea. Fluent Chinese readers should go to the original of course.

"Older housing reverse mortgage endowment insurance" is one of the main ways Housing Endowment, currently more common in foreign countries, but in the domestic development has just started. Zhan pay, if the pilot is successful, the elderly pension funds for solving problems and revitalize existing housing resources has positive significance.

 

According to reports, "housing reverse mortgages" refers to the elderly will be your own house property mortgaged to financial institutions, in order to obtain a certain amount of periodic pension or receiving a pension service apartments for the elderly way. Financial institutions can obtain property rights or the right to use. And "renting replacement" is through rental housing for rental, and ultimately through rental income to stay at the nursing home.

6. High margins bring new competitors
There is talk in Australia about one of their big (very big) supermarket chains applying for a banking license - and entering the mortgage market. Coles triggered a milk price war and since that one started, milk prices in all Aussie supermarkets is still $1/litre. The ex-head of their competition watchdog sees little to worry about. More from a transcript published by the ABC:

ELIZA HARVEY: There's been a lot of focus, particularly with Coles - the price of milk, you know, they've really brought that price down and many have said that they're undercutting the market. I mean, there is some concern out there that a similar thing would happen in the housing sector and potentially artificially draw down prices to such an extent that it could fuel this housing bubble. Would you share any of those concerns?

GRAEME SAMUEL: I find all this a little bit amusing. Now, what are we worried about? That there might be a corporate group that comes into the market and charges too low an interest rate and what? Is going to drive out a business, one of the big banks? I mean, this is all very, very strange, strange arguments.

Housing booms and housing price booms generally don't result solely from interest rates. They relate to a whole range of different factors concerning the economy at large, the availability of housing stock. I find it very strange indeed particularly with the discussions that we've had over the past few years since the Global Financial Crisis about a lack of competition in the banking market - I have to say a discussion about which I think there've been very little analysis. But with all that, I can hardly imagine anyone could sensibly say that the entry of another group into the housing loan market was an undesirable outcome.

7. Jobs or pay, a tough choice?
California is testing the economic consequences of raising the minimum wage sharply. Will it increase the ability of their economy to grow because more people have more money to spend, or will it cost jobs? The State has approved a jump from US$8.00/hr to $10.00/hr, a 25% jump over three years. (NZ$9.75/hr to NZ$12.20/hr.)

The Sacramento Bee profiled how it would affect about 1 million workers in the state. California has an 8.7% unemployment rate, the seventh highest in the country well above the national average of 7.3% - although it is dropping the fastest (y-on-y) of any state.

The governor buoyed the effort to raise California's minimum wage by announcing on Wednesday that he would support Assembly Bill 10. After a debate in which supporters frequently invoked a widening national gulf between rich and poor, the Assembly voted 51-25 to send Brown the bill.

Some lawmakers recounted growing up in households supported by parents making the legal minimum. Others sought to refute a common argument that minimum wage jobs largely go to young people just entering the workforce, speaking of constituents working multiple minimum-wage jobs.

"This bill is a modest down payment that is predictable and that makes huge differences in the lives of those who get the increase," said Assembly Speaker John A Pérez, D-Los Angeles. "It is easy for those in the room who make $90,000 a year plus to discount the struggle of those who are getting by on minimum wage."

8. Big bucks, missing out on the big role
Here's an eye-popping phrase: "He often made between $60,000 and $135,000 per speaking engagement." That's US dollars. It's also for Larry Summers, the recently withdrawn Fed candidate.

Actually he has a history of not quite getting the big role. He was up for US Treasury secretary in 2008, Federal Reserve chairman in 2009, World Bank president in 2012, and Fed chair again in 2013 - none of which he got.

Quartz has a nice review.

9. Did capitalism fail?
We are hearing a lot of what-and-why analysis now the five year anniversary of the Lehman collapse is upon us. Regulators, bankers, and rating agencies bear much of the blame for the 2008 crisis. But the near-meltdown was not so much a failure of capitalism as it was a failure of contemporary economic models’ understanding of the role and functioning of financial markets – and, more broadly, instability – in capitalist economies. Or so says two New York economics professors:

[T]o put it bluntly, the belief that an economist can fully specify in advance how aggregate outcomes – and thus the potential level of economic activity – unfold over time is bogus. The projections implied by the Fed’s macro-econometric model concerning the timing and effects of the 2008 economic stimulus on unemployment, which have been notoriously wide of the mark, are a case in point.

Yet the mainstream of the economics profession insists that such mechanistic models retain validity. Nobel laureate economist Paul Krugman, for example, claims that “a back-of-the-envelope calculation” on the basis of “textbook macroeconomics” indicates that the $800 billion US fiscal stimulus in 2009 should have been three times bigger.

Clearly, we need a new textbook. The question is not whether fiscal stimulus helped, or whether a larger stimulus would have helped more, but whether policymakers should rely on any model that assumes that the future follows mechanically from the past. For example, the housing-market collapse that left millions of US homeowners underwater is not part of textbook models, but it made precise calculations of fiscal stimulus based on them impossible. The public should be highly suspicious of claims that such models provide any scientific basis for economic policy.

As Mervyn King, the former governor of the Bank of England, put it, “Our understanding of the economy is incomplete and constantly evolving….To describe monetary policy in terms of a constant rule derived from a known model of the economy is to ignore this process of learning.” His successor, Mark Carney, has come to embody this view, eschewing fixed policy rules in favor of the constrained discretion implied by guidance ranges for key indicators.

Rather than trying to hit precise numerical targets, whether for inflation or unemployment, policymaking in this mode attempts to dampen excessive fluctuations. It thus responds to actual problems, not to theories and rules (which these problems may have rendered obsolete). If we are honest about the causes of the 2008 crisis – and serious about avoiding its recurrence – we must accept what economic analysis cannot deliver in order to benefit from what it can.

10. Today's quote
"It’s amazing how fast later comes when you buy now!" Milton Berle

11. Herne Bay skippers
Our offices are in the Auckland suburb of Herne Bay so we know the neighbourhood well. It was interesting to read today's NZ Herald a story pointing out that both Jimmy Spithill (Oracle skipper) and Dean Barker (TNZ skipper) both own houses on one of the most upmarket streets in our 'hood - and are almost neighbours.

Spithill can't lose - if TNZ wins the cup, the value of his three Auckland properties (especially his Herne Bay one) will no doubt rise substantially.