Streetwise Professor

Last week it looked like the Obama administration had decided to be sensible on at least one energy issue-the export of LNG.  It approved a new license (for Freeport LNG) for export to countries with which the US has no free trade agreement.  But the WSJ reports that new Energy Secretary Ernest Moniz is thinking of putting on the brakes again.  Because we need more studies.  No.  Seriously:

Mr. Moniz showed caution about the existing studies. Speaking to reporters after a speech to an energy-efficiency conference here, he said he was “committed to doing a review of what’s out there in terms of impact analyses” before approving more applications to export U.S. natural gas. Critics have said last year’s study didn’t rely on the best data available.

“Right now we have no plans of commissioning new studies, but everything is on the table until I have done my analysis,” Mr. Moniz told reporters after his first public remarks as energy secretary

Sorry.  We don’t need no steenkin’ studies.  The whole idea smacks of central planning.  The presumption should be that if firms are willing to risk their private capital, the benefits exceed the costs.  Any analysis should be restricted to potential externalities.  Real externalities.  Not pecuniary ones.

But these “impact studies” are all about pecuniary externalities.  Namely, they focus on the effects of exports on prices of natural gas, and the effects of natural gas prices on consuming industries (like petrochemicals).  But these price effects are not true externalities that lead to inefficient allocation of resources.   Indeed, restricting exports because of these effects would cause a misallocation of resources.

Pecuniary effects do have distributive effects.  In the case of LNG exports, they affect the distribution of rents between gas producers in the US and foreign consumers on the one hand, and domestic gas consumers on the other.

And that’s what the need to get an export permit does: it permits the government to affect the distribution of rents.  That, in turn, gives rise to rent seeking.  And corruption.

In this context John Cochrane mentions the Indian “permit raj”: there you need to get a permit for everything.  This gives those with the authority to grant permits incredible power.  Power they use to enrich themselves and secure political support.

That is exactly what can go on here.  Those hoping to get a permit have an incentive to exert influence, through lobbying, campaign contributions, and supporting public campaigns on issues favored by the administration.  They also realize that they face substantial risks if they oppose the administration on other issues: “Nice little LNG terminal proposal you have here.  Would be a tragedy if something happened to it.”

The government has no business being in this business, beyond perhaps-perhaps-addressing real externality issues.  But even there, other mechanisms (e.g., liability for pollution) may be preferable to a permitting process.  (Look at how Russia used environmental regulations to drive Shell out of Sakhalin II: any power to permit can be used to expropriate of hold up the party seeking the permit.)

In the US, energy, and particularly the international trade of energy, is particularly raj-like: Keystone II is another example.  This destroys value in myriad ways.  Beneficial investments are delayed, or not made at all, either because the government stops them directly, or the risks and costs of getting approval undermine the economics.  Real resources are used to influence policy.  Since energy investments involve big dollars, the losses can be big too.

People often lament the lack of an American energy policy.  I disagree.  We do have an energy policy, and the Energy Raj is a big part of that policy.  A better policy, by far, would be no policy at all.  Would that the DOE adopt the motto: “Don’t just do something! Stand there!”

I’m not holding my breath, though.  The benefits of the raj to the rajahs are far too great.

My main beef with Tesla Motors is that it is a major beneficiary of government largesse masquerading as a free market success story.  The company received a $450 million loan from the Federal government to set up operations.  It has just paid back that loan, but does not justify granting the loan in the first place: indeed, it illustrates the heads-Musk-makes-a-lot-of-money-tails-the-taxpayers-eat-it aspect of the loan.  It socialized the risk of loss, and privatized the gains.  That’s bad, on principle.  (Things might have been ameliorated had the warrant the government received allowed it to participate in the upside, but the exact opposite happened: the warrant went away precisely when the stock price went parabolic.)

But the loan isn’t the biggest source of government support. The $7500/vehicle federal subsidy to purchasers and California’s Zero Emissions Vehicle (ZEV) credit program are.  When you look at the value of these subsidies, they dwarf the much ballyhooed profit Tesla reported for the first quarter (and those profits were driven by the write-down of the warrant and non-repeatable gains on yen exposure).

I’ve done some back of the envelope calculations to estimate just how much these subsidies benefited Tesla’s shareholders.  The basic idea is to calculate profits with and without the subsidies based two assumptions about the demand for Teslas: a constant elasticity demand curve and a linear demand curve.

The linear case is easiest to explain.  The equation is P=A-bQ, where P is price and Q is quantity sold.  A and b are constants that need to be solved for.  P and Q are known for the first quarter: I’ll use $75K for P (the average price of a Model S) and Q is 4750.  If Tesla was maximizing profits, it would set its marginal revenue equal to marginal cost, where the marginal cost nets out the subsidies.  The relevant equation is C-S=A-2bQ.  I derive C from the cost of generating revenue reported in the 10Q.  I divide this sum by Q, and then multiply by .6 because the cost number includes some fixed costs (e.g., tooling) and I want marginal cost: it turns out that the results I derive aren’t that sensitive to the multiple.  For S I add $7500 and Tesla’s ZEV credit revenues (reported in the 10Q) divided by the number of vehicles sold.  I now have 2 equations, and can solve for the unknown constants A and b.

I now have all I need to know to figure out revenues (including subsidy payments) net of variable costs.  This totals $206 million.  I can also figure out the price and quantity of Teslas sold without the subsidy.  Absent subsidy, Tesla would choose Q to satisfy: C=A-2bQ, which gives Q=(A-C)/2.  This can be plugged back into the price equation.

Doing this gives a no-subsidy quantity of 3558 (about 70 percent of the with-subsidy sales) and a price of $91K.  Using these numbers, and the assumed unit cost gives a no-subsidy profit (before fixed costs, etc.) of $116 million.

In other words, in this specification, Tesla pocketed about $90 million due to subsidies in one quarter alone.  That represents about 18 percent of its auto sales revenues, and dwarfs its profit even including the one-time boosters.

In the constant elasticity specification, I need to solve for the demand elasticity and the constant multiplying the Q raised to the elasticity.  Given the price, quantity, cost, and subsidy numbers, I can solve for these two constants using the demand equation and the marginal revenue equals marginal cost equation.  Given these constants, I can figure out profits with and without subsidies.

In the constant elasticity case, profit with subsidies (before fixed charges) is again $206 million, and profit without the subsidies is estimated to be $139 million.  So in the constant elasticity specification, subsidies pad Tesla’s profits by $67 million.

These are numbers for one quarter, folks.  This is money out of your pockets, or the pockets of shareholders of Ford, Toyota, etc., who have to buy ZEV credits.  Tesla would still be drowning in red ink absent the fat subsidies.

I sure hope you are enjoying Mr. Musk’s Wild Ride at your expense.  Your enjoyment being completely vicarious, of course, expect for the paying for it part.  That’s something you experience personally.

I would hope that these figures put the hype in perspective.  Tesla cars are fueled by electricity.  Telsa Motors is fueled by government money.  Your money.

One more thing.  Tesla and Musk are neck deep in a relationship with Goldman-Sachs, aka Government Sachs.  Think that it’s just maybe possible that Goldman will deploy its notorious political heft to keep the rain of government manna going?  If you doubt that, can I interest you in a bridge connecting two boroughs in NYC?  Which makes it doubly ironic-and nauseating-that many of the Tesla Kool Aid Gang also declaim against crony capitalism.  Well, so do I, except I at least do so with a modicum of consistency.

The fecklessness of the Obama administration’s approach to Russia beggars description.  Suffice it to say that the more earnestly Kerry implores the Russians to facilitate some less messy (not neat, just less messy) transition in Syria, the more abusively Putin and Lavrov behave.  The Moscow “spy” fiasco is part of that.  So are many other things-which I’ll discuss in a bit.

Kerry and Obama should wear “kick [or something more vulgar] me, Vlad” pinned to their backsides.  Hell, maybe they already do.  That would be consistent with the evidence, because Putin and Lavrov are kicking hard, kicking fast, and kicking often.

Look.  The Russians are doubling down on supporting Assad.  They are deploying large pieces of their ramshackle navy to the eastern Med.  (Including tugboats!  There must be tugboats! And I mean plural!) There is one reason and one reason only to do this: to make it virtually impossible for the US to use naval assets to do anything in Syria, including enforcement of a no-fly zone, or more drastic measures.  It is a tripwire.  The extensiveness of the deployment, given Russian naval capabilities, is such that even the blind should see that the Russians are making a major commitment to Assad.

What’s worse, in addition to sending Syria advanced S-300 and Pantir AA missiles, the Russians are supplying Syria with advanced Yakhot supersonic anti-ship missiles.  The Yakhot is a capable system.  The US has been aware of it for some time and presumably has many countermeasures in place, but they do represent a substantial increase in Syria’s capability and will dramatically increase the difficulties of any carrier operations in the eastern Med.

The Pentagon went ballistic at the news. Even Hagel bestirred himself to criticize the move.

But that’s what gets us to what’s worst: the State Department response.  According to Foggy Bottom, there’s no problem because these are not “new sales”:

Jennifer Psaki, a State Department spokeswoman, said Russia had disclosed the sale of the Yakhont missiles in 2011, and she added that U.S. and Russian diplomats were still planning the Geneva conference next month.

FFS.  That’s exactly the Russian line.  Exactly.  Gee, Jennifer, great job you got there, being Sergei Lavrov’s parrot.

I am sure the Navy (and the Israeli Navy) is so pleased that they will only be targeted by previously contracted for weapons, not new sales.  And John “Reporting for Duty” Kerry isn’t the one who will be painted by the Yakhot’s terminal guidance system.  Maybe he should think about those who could be, rather than sucking up to Sergei.

And all this BS about “defensive weapons” is just that.  They provide Assad a shield behind which he can slaughter the opposition with substantially less fear of any intervention.

And insofar as the sanctity of contracts is concerned.  First, since when have contracts ever meant jack to the Russians?  Second, to give an example of how this can be done, just look at how the US stiffed Pakistan for years over F-16 sales.  Where there’s a will, there’s a way.  Russia isn’t delivering weapons because their compelled to: they’re delivering weapons because they want to.  (Uhm, and how would the Syrians enforce a breach, anyways?)

Meanwhile, Kerry and the Brits and the UN are nattering on about some meeting in Geneva between the contending forces in Syria.  Yeah, like meetings in Geneva ever accomplish squat where existential and brutal civil wars are involved.

The Russians are making it very clear they are doubling down on Assad, and will defend his regime to the last.  Their deeds speak volumes.

I’m not advocating or even supporting US action in Syria.  Obama frittered away that opportunity a long time ago.  When wars get to the eating the eating your enemy’s hearts stage (and this by the “moderates” no less), the situation is pretty much beyond salvage, even by Russian tugs.

But it’s best to recognize what Russia is up to here, and state that forthrightly.  Make it plain who is ultimately responsible for the horror that is occurring in Syria.  Chasing after Putin and Lavrov like some pitiful suitor, and regurgitating the Russian party line in a way that undercuts our own military’s serious concerns, is just nauseating.  It’s worse than that.  It’s craven.  Cosmically craven.  And Putin will note that, and act accordingly in other things that matter.

I’m sure you’ve read all about the bizarre “spy” scandal in which a US State Department employee attached to the embassy in Moscow was arrested for espionage and thrown out of the country.

Everything about the story is risible.  The wigs. The map.  The Boy Scout compass (I had one like that decades ago.  Maybe we don’t trust Glonass!) The cash: umm, wouldn’t wire transfers to offshore bank accounts be more reliable and safer?  The location: why meet in Moscow, and not overseas?  Most notably letter detailing fiendish American plot to bribe Soviet . . . I mean Russian intelligence officer.  Yeah, you’re going to spell all that out in plain text?  Heck, the Hardy Boys would have known to use invisible ink.  And code.

No, this was theater.  My guess is that the FSB compromised Mr. Fogle, the alleged spy in some way.  My initial guess was a honey trap, but it may well be something seedier, like cruising.

Under either of those scenarios,  the FSB would have had considerable control over the timing of the big announcement.  No doubt Fogle was under surveillance, and if he was doing something compromise-able, the Russians had the ability to choose when to compromise him.  They also had the ability to do it quietly, or in the way they did it: an over the top spy spoof, that was deliberately absurd.

By choosing to compromise him now, and in such an outlandish way, the Russians were sending a message: indeed, the outlandishness was part of the message.  Pushback over our criticism of their handling of Tsarnaev?: they made a big deal that the FSB agent Fogle was allegedly recruiting was an anti-terrorism specialist from the North Caucasus.  Something related to Syria, Kerry’s visit, etc.?: Trying to embarrass the US during a period of time the US is trying to pressure and cajole Russia into dumping Assad?  Dunno.

Whatever it is, the real story is hiding behind a wig.  Almost quite literally.  But I’m pretty damn sure Fogle or the CIA weren’t the ones who bought it.

Electric vehicle manufacturer Tesla’s stock rocketed up last week after the company reported positive earnings and operating cash flow for the first quarter.  The stock had been heavily shorted, and short covering evidently fueled the stock’s take off.

Color me skeptical.  The company was heavily shorted for good reason, and is even more ripe for shorting after the run-up.  (Personal opinion.  Not investment advice.  You’re on your own about that.)

For one thing, although operating results did improve from the (really terrible 3/4Q12), the much hyped earnings number was put into positive territory by two items: a write down of a warrant that Tesla granted the Department of Energy as part of a $465 million DOE loan to the company, and FX gains (mainly on yen).  Not repeatable.  And the first seems highly dodgy to me-a squishy number based on an assumption that Tesla will be able to pay off the loan.

I’m also skeptical because of the near miraculous nature of the turnaround. Mere months ago, the company was in dire straits:

It’s a lucky thing for Tesla Motors shareholders that the U.S. Department of Energy loves the company’s loan applications.

Without the hundreds of millions of dollars Tesla (US:TSLA) has received from the federal government this year, the electric-car maker’s financials would be gasping for air as 2012 winds down.

Given the ugly state of Tesla’s finances — and the company’s sky-high valuation: almost $4 billion — it will rank among the top candidates in Silicon Valley for a 2013 stock collapse, unless it receives significantly more cash next year.

I get a whiff of a company that needed a miracle to stave off disaster.  Maybe it got one, but I am always skeptical of miracles whenever accounting is involved.  And that’s certainly the case here.

The shorts have been bloodied, but they’ll be back.  Indeed, this seems like a typical battle in a war between a dodgy company and short sellers.

But I am most skeptical because of Tesla’s not-really-founder-but-biggest-investor, Elon Musk.

Mr. Musk is Occupy’s favorite crony capitalist.  And Occupy is one of Mr. Musk’s favorite movements.

Yes, once upon a time Musk started a real business, Paypal, that proved very successful without any government help.  That was then, this is now.

Musk has three ventures: Tesla, SpaceX, and SolarCity.  All are heavily dependent on government largesse.

Take Tesla for starters. It received the $465 mm loan from DOE, but it also benefits from a $7500/car federal subsidy for electric cars.  Moreover, it benefits from the State of California’s Zero Emissions Credit program.  In its infinite wisdom, CA mandated that all the major auto companies sell a certain number of zero emissions vehicles.  If they don’t they have to buy credits from companies that do make them-namely, Tesla.  This was also essential in putting the  company in the black in Q1, and the company is sitting on $250 mm worth of these credits.

IOW, Tesla’s profits are courtesy of you, the taxpayer-and also courtesy of the shareholders of Ford, GM, Toyota, Honda, etc.

Next consider SpaceX.  This venture provides evidence of Musk’s love for Occupy: he has promised that this private space venture will go to Mars, and wears an Occupy Mars shirt to make the point.

It is also touted as a privately capitalized space venture, which it is, I guess, but it is also almost completely dependent on government contracts.  The private money is attracted by the scent of public money.   Sorry, but a company that is dependent on NASA’s IV for support is not truly a private company: the company is basically a cutout between the investors and the taxpayers.

The company has not exactly covered itself in glory.  It had serious trouble with its initial launches, including an embarrassing episode in which the ashes of Star Trek’s Scotty, James Doohan, were on a SpaceX craft that didn’t make it into space: it crashed instead somewhere in the South Pacific.  Which I guess would have been great if James Doohan had starred in South Pacific.  Don’t worry, though.  As a precaution, some of Mr. Doohan’s ashes were retained, and that part of the beloved actor’s remains did make it into space as he desired.

And speaking of Broadway and movie classics, Musk is auditioning for a role in a summer stock Music Man with his boosterism of SpaceX:

You don’t have to be a believer in conspiracy theories to wonder why senior government officials are so committed to going the commercial route in space. Even a cursory review of SpaceX programs and plans reveals reasons for doubt. The questions begin with a business strategy that isn’t just disruptive, but downright incredible. Mr. Musk says that he can offer launch prices far below those quoted by any traditional provider — including the Chinese — by running a lean, vertically integrated enterprise with minimal government oversight that achieves sizable economies of scale. The economies of scale are possible, he contends, because there is huge pent-up demand for space travel in the marketplace that cannot be met within the prevailing pricing structure. By dropping prices substantially, this latent demand can then be unlocked, greatly increasing the rate of rocket production and launches. When combined with other features of the SpaceX business model, the increased pace of production and launches results in revolutionary price reductions.

There isn’t much serious research to demonstrate that the pent-up demand Musk postulates really exists, nor that the price reductions he foresees are feasible. He has suggested in some interviews that launch costs could decline to a small fraction of current levels if all the assumptions in his business plan come true, and he has posted a commentary on his web-site explaining how SpaceX is already able to offer the lowest prices in the business. It’s hard to look inside the operations of a private company, but SpaceX does seem to be doing all the things necessary to minimize costs such as using proven technology, building as many items as possible in-house, and hiring a young workforce willing to work long hours. And to his credit, Musk has committed over $100 million of his own money to the venture. However, his rockets have major performance limitations compared with other launch vehicles in the market, and they are not yet rated as safe for carrying people. Becoming “man-rated” will necessarily increase the role of federal officials in monitoring SpaceX operations, which is not good news for a business model grounded in minimal government oversight (traditional launch providers say government regulations and overhead charges are a key driver in their own pricing policies).

Downright incredible sounds about right.  It sounds like a con to me.  Especially the whole “economy of scale” thing.  That’s the kind of thing defense contractors say to get the government to buy more units of a plane or ship.  It’s not good economics.

And Musk’s winning personality was on display when questioned about SpaceX’s launch failures:

Mr. Musk recently responded to a question from Space News reporter Amy Svitak about the two-year delay in accomplishing that second Falcon 9 launch by observing, “In the space business that’s on time.” Perhaps he was irritated by the reporter’s implied criticism, but it goes without saying that if astronauts on board the space station are awaiting supplies, a prolonged launch delay could spell big trouble.

What a guy.  Takes your money, and then gets peevish when you accuse him he’s blowing it.

Then there is SolarCity, an installer of solar panels.  The solar industry has raked in $4.1 billion of stimulus money, and the government thinks that SolarCity in particular has played fast and loose with the numbers to  get more than it should:

Last July, federal investigators subpoenaed SolarCity Corp., SCTY +9.10% the largest installer of residential solar panels, as part of a probe into whether solar-power companies received excessive government grants.

. . . .

Even before the Treasury Department’s inquiry into grant applications filed by SolarCity and other installers, House Republicans had questioned the program’s effectiveness in creating jobs. Congress declined to renew the grant program at the end of 2011, and only projects that were being planned by that date can receive grants today.

The government is looking into whether SolarCity and other firms misrepresented the fair-market value of solar systems in order to boost the value of the grants they received. In its suit, SolarCity says two of the company’s subsidiaries received smaller-than-expected grants. The company doesn’t say exactly how much funding it applied for originally, but it says the final grants issued by the Treasury Department were $8 million less than was proper under the law.

But SolarCity is doubling down on the chutzpah, and suing the government, claiming the government has paid it too little!:

Now, SolarCity is pushing back with a lawsuit that alleges the opposite: some of the taxpayer-funded grants it received weren’t as big as originally promised.

The suit, filed quietly in February in the U.S. Court of Federal Claims, comes as SolarCity and other industry players are defending solar-friendly government policies, and it could undermine the industry’s message that solar power will soon be viable without government help.

Solar businesses have cratered around the world: China, Spain, Germany.  The industry is addicted to government support.

Elon Musk has a plan to get rich.  It involves you.  The taxpayer.  You pay taxes.  The government gives huge dollops of that money to Elon.  Elon gets rich.  Who could possibly object? Who could deny Elon’s genius?

He certainly thinks he’s a genius.  He has no hesitations in telling people so.

And there is a kind of perverse genius here.  In the Age of Obama he has found the key to riches.  Get in good with the government-by, you know, sponsoring an inaugural ball.  And then let the government give you the goodies.  Then sue the government if they don’t give you enough goodies.

And then preen before the world, touting your genius-and your environmental credentials. (Pay no attention to that private jet behind the curtain!) (Musk quit the Zuckerberg-created immigration lobbying effort FWD.us because it bought ads supporting politicians who support immigration changes but also had the temerity to support the Keystone pipeline.)

What a repulsive man.

Repulsive, yes, but sadly, Elon Musk is a Man For Our Age, in more ways than one.

There are reports that the CFTC will vote on the SEF rule next week.  The rule had been in limbo for months due to Gensler’s insistence that the rule require those requesting a quote solicit them from five potential counterparties.  Gensler has apparently relented because he could not get the new Democratic commissioner, Mark Wetjen, to join with Chilton and Gensler to vote out the 5 RFQ rule.

The compromise will require users to solicit two quotes for the next two years, and then three thereafter.

Whatever.

On the 1 year anniversary of the DFA, I named the SEF mandate as The Worst of Frankendodd. I haven’t changed my mind on that, though the competition is fierce.  And the RFQ requirement is the Worst of the Worst.  It is defended as a way of  improving competition.

This is at best paternalistic.  It presumes that those who want to enter into swaps don’t know their own interests.  Perhaps Gensler thinks that the buy side suffers from some sort of Stockholm Syndrome after years of captivity to the dealer banks.

In reality, buy side firms-most of whom are extremely experienced and sophisticated-are making trade-offs between competition and information leakage.  They are trying to minimize cost of execution, and have the information and incentive to do that.  Note too that they are required to do this for every trade, regardless of instrument, size, and other factors that may influence the trade-off.  But nope, one size fits all. They should be allowed to make that trade-off themselves, without any guidance from Gary.

RFQ5?  How about RFQ0?

Here’s an analogy.  How would you like it if the government told you how many stores you had to visit before making a purchase?  You know, to make sure that you get the best price.  Call it the CS5 rule.  You have to comparison shop at five stores before making a purchase.  On everything.   Of course, when deciding on whether to shop at one store or five, you trade-off the potential savings (which will depend on the value of the purchase, the good you are shopping for, and other factors) from shopping around more, against the cost (which will vary with the value of your time, how hurried you are, your income, the price of gas, where you live, etc.)  But none of that matters under the CS5 rule.  Want to buy a quart of milk?  Shop at five stores.  For your own good.

Yeah.  It’s that bad.  CS2 would be bad, but not that bad.

Once the SEF rule goes into effect it will be interesting to see how the structure of the industry involves.  There will be a land rush of new SEFs.  I predict there will be a shakeout, and there may well be only a single dominant SEF for each major instrument.  The SEF rule does not, as I understand it, require a SEF to send an order to another SEF offering a better quote.  Which means that the network effects of liquidity will tend to cause trading activity to “tip” to a single SEF for products big enough to support order book trading.

But the whole SEF landscape will also be shaped by the margin rules, the Bloomberg suit over those rules, block trading rules, and on and on.  The rule is not the beginning of the end, it is barely the end of the beginning.

The Obama administration is planning on easing repayment terms for student loans:

The White House proposes that the government forgive billions of dollars in student debt over the next decade, a plan that cheers student advocates, but critics say it would expand a program that already encourages students to borrow too much and stick taxpayers with the bill.

The proposal, included in President Barack Obama’s budget for next year, would increase the number of borrowers eligible for a program known casually as income-based repayment, which aims to help low-income workers stay current on federal student debt.

Borrowers in the program make monthly payments equivalent to 10% of their income after taxes and basic living expenses, regardless of how much they owe. After 20 years of on-time payments—10 years for those who work in public or nonprofit jobs—the balance is forgiven.

This is a statement against interest, and the proposal is hardly surprising, considering the source but I must say: This is a horrible idea.

We are constantly lectured how higher education is an “investment.”  Sometimes it is.  That investment has a rate of return.  What’s important that capital-financial, human, the opportunity cost of student time-earn a return that covers the opportunity cost of capital.  We want individuals whose ROR exceeds the relevant interest rate to make the investment, and those whose ROR doesn’t not to make it.  This isn’t rocket science.

Tying repayments to income totally undermines those incentives.  Hey, go get a low earning degree, one that has a poor rate of return-and likely, a negative rate of return-and you will make lower payments!  What could go wrong?

This reduces the cost of pursuing low-return majors, so we will have more graduates with psych or anthro degrees who will work in retail and fast food and other low-wage occupations.   That is horrible.  The exact opposite of what we want.

Try doing this at your local bank, by the way.  Not too many I know of advertise their wonderful Loser Loan Programs: “The worse your financial performance, the lower your payment!”

Yes, I know the idea is to provide insurance against income losses due to illness, or job loss, etc., but that insurance will be rife with moral hazard.

Another example of the problems when the government intervenes in the capital allocation process.  That worked out so well in the housing market, didn’t it?  This will work out no better.  It will raise expectations and saddle people with heavy burdens, thereby contributing to disillusionment and anger.

It is also highly cynical and manipulative.  Those most likely to get hurt are those who are least able to evaluate the costs and benefits of getting a college education.  Moreover, Obama administration policy is already screwing the young in ways that could teach the Kama Sutra some things, and this will add to that, all in the name of helping those who get screwed.

It is perhaps another example of what Raghuram Rajan identified as a feature of US polices ostensibly intended to reduce inequality.  He specifically focuses on subsidizing homeownership, but this is exactly the same thing that goes on with student loans.

Education can be a great thing, if you make wise choices.  One thing I’ve been on about for years is that learning programming is an important skill.  You don’t have to be a programmer, but you should know some programming.  It is a functional skill, and also helps you learn to think logically and precisely.  So I agree with this WSJ piece.

Unfortunately, easing student loan terms along the lines proposed by the administration will not provide incentives to do that.  It will provide incentives to do the opposite, and hurt most those it is intended to help.  Like the title says, run when the government-and especially this administration-says they’re doing something to help you.

Benghazi is beginning to resemble some horror movie monster.  Obama, Hillary, and the rest of the administration had thought that they had killed it-with the active connivance of the media.  But the supposedly dead creature is coming back to life.

The cause of its rejuvenation is the testimony of 3 “whistleblowers” whose accounts flatly contradict every aspect of the Party Line.

The most eye-opening revelation was by deputy mission chief in Libya, Gregory Hicks.  Not only did he claim that he believed that the assault in Benghazi was a terrorist operation “from the get go”, he also revealed that a Special Operations team in Tripoli was denied permission to fly to Benghazi.  This flatly contradicts claims that no “stand down” order was ever given.  (Though I should note that the claim is that the “White House” gave no such order.  That does not mean DoD or the AFRICOM commander, General Ham, gave no such order.)

l had immediately discounted the account (given to Fox News) of an alleged Special Operations individual that a Special Operations team training in Croatia could have been deployed in time.  And others more knowledgeable than I discount this as bulls*t. But Tripoli is a totally different matter.  This revelation is like a bolt from the blue: there had never been any mention, to my recollection, of US operators in Tripoli.

So why weren’t they deployed?  This is the heart of the debacle, IMO.  Hicks also testified that no air assets-zero, zip, nada-were available to attack in Benghazi.  There were F-16s in Aviano, in Italy, but no tankers available to refuel them. I think that the Pentagon or General Ham was loath to reinforce failure, and to put a Special Operations team into an area taking mortar and heavy weapons fire, and under assault from a large number of insurgents, without air support.

As a tactical decision, this makes sense.  But it just emphasizes the prior, criminal failure.  A failure to have contingency plans in place, and the means available to carry them out, in the event that Benghazi was attacked.  It is said of our unpreparedness at Pearl Harbor: “At dawn we slept.”  In Benghazi, it can be said of our unpreparedness: “At dusk we slept.”

This is particularly criminal given two facts about Benghazi.  First, it was an Al Qaeda snakepit.  Second, the US was clearly up to something in Benghazi.  Something involving weapons: no, not smuggling them to rebels in Syria, but trying to collect them to keep them from radical hands.  And likely something involving interrogations of Al Qaeda captives.

Either activity-or both-made the “consulate” in Benghazi and the CIA annex prime targets for terrorists.  The place was lousy with terrorists.  Motive plus opportunity.  It was a virtual certainty that something bad would happen there, meaning that we should have been prepared for that something.  But we weren’t.

So why was the US so unprepared for a terrorist attack?  On 911 no less? Admiral Kimmel and General Short were paragons of preparedness, compared to Panetta, Petraeus, Hillary, and Obama.  It is beyond criminal, actually.

What’s next?  Can we expect bombshells?  Holding the culpable to account?

Count me as skeptical.  Who will hold them to account? Everyone in DC is highly compromised.

The press? Please. They ran cover for Obama and Hillary and Susan Rice from day 1.  Blowing the whistle on them now is blowing the whistle on themselves.

The Senate Republicans, like McCain, Graham, and Chambliss?  Please again.  They had an opportunity in October.  They made harrumphing noises, but did not press the issue.  Why?  Because they likely knew of what was happening in Benghazi (the weapons, the interrogations), and approved of it.   They knew that blowing the whistle on Benghazi would blow the lid on what the CIA was doing there, and leave them in a more than awkward position.  McCain et al played their roles in the Kabuki theater to perfection in the fall.  They will again.

The only way that the truth will out is due to the dynamics between Obama, Hillary, and the Senate Republicans.

This is like the final scene from the Good, the Bad, and the Ugly-a three way standoff.  (Except there’s no Clint Eastwood Good guy here.)  (For a grimmer example, think Stalin, Trotsky, and Bukharin.)

Hillary has ambitions for 2016.  She and Obama are not friends or allies: Obama put her in the cabinet under the “hold your friends close and your enemies closer” theory.  It seems clear that Hillary made catastrophic decisions before and during the assault.  She is the most responsible.  But given her ambitions, power, and connections, most are loath to confront her.

Obama would be hamstrung for the remaining 40-odd months of his second term by anything that laid the fault for Benghazi at his feet.  He doesn’t like Hillary.  She would make a perfect fall gal.

The Senate Republicans can push the direction of any inquiries.  But they are likely compromised.  Who should they align with?

I don’t know for certain the equilibrium in this game, but the most likely reasoning goes as this.  Obama is president now-no changing that.  Hillary wants to be president, and is the most formidable Democrat challenger in 2016.  Siding with Hillary to shaft Obama would result in a crippled presidency during a period of international danger, and reduce the Republicans’ odds of prevailing in 2016.  Siding with Obama to shaft Hillary would help the Republicans in 2016, and give the Republicans some leverage over Obama for the next three-plus years.  So I predict that Hillary will carry the can.  Which will lead to a civil war in the Democratic Party.  This civil war-and Hillary’s existential fight for political survival-is the only way that something of the truth will come out.

Back in October I said the worst outcome would be that the Benghazi issue would be suppressed until after the election, only to resurface in a 2d Obama term, where it would create a political and perhaps Constitutional crisis.

That’s where we are now.  That is not a good place to be.

Our fundamental issue right now is that no one in power is on the side of the truth.  The Pentagon, the CIA, the State Department, the Administration, the President, the press, and the opposition “leadership”, such as it is, are hopelessly compromised. And they are all in the 202 area code, and the main interest of people in DC, regardless of party, is protecting DC.  Meaning that there is no real “opposition” to speak of.

So don’t expect the truth about Benghazi to come out, or for the responsible to be held accountable, except as the unintended effect of a war to the knife between Hillary and Obama.

How sad is that? How sad is that?

That high pitched noise you hear is the shrieks of those who are Shocked! and Disgusted! by historian Niall Ferguson’s drawing a connection between Keynes’, umm, Bohemianism and his economic views.  That moral avatar Henry Blodget (banned from the securities industry for life, by the way) describes what Ferguson says as “bizarre and offensive”:

Speaking at the Tenth Annual Altegris Conference in Carlsbad, Calif., in front of a group of more than 500 financial advisors and investors, Ferguson responded to a question about Keynes’ famous philosophy of self-interest versus the economic philosophy of Edmund Burke, who believed there was a social contract among the living, as well as the dead. Ferguson asked the audience how many children Keynes had. He explained that Keynes had none because he was a homosexual and was married to a ballerina, with whom he likely talked of “poetry” rather than procreated. The audience went quiet at the remark. Some attendees later said they found the remarks offensive.

Well, this idea didn’t spring first from Ferguson’s fertile imagination-or febrile imagination, as his critics would have it.  Joseph Schumpeter, leaving out the gay bits, made essentially the same point in his chapter on Keynes in his Ten Great Economists From Marx to Keynes: “He was childless and his philosophy of life was essentially a short-run philosophy.”  That was written in 1951, and of course homosexuality just wasn’t mentioned then.  One could argue that ironically, the greater acceptance of homosexuality is precisely why Ferguson today could make explicit what Schumpeter only hinted at in the benighted 50s.

Schumpeter was a giant as an economist.  He knew Keynes.  He knew Keynes’s milieu. He was one of the greatest historians of economic thought.  He was also unconventional in his private life, though in a different way.  So he speaks with some authority.  Not that one should automatically defer to such authority, but when someone like Schumpeter says it, you know it’s not the unconsidered musings of an ignorant man.  It is the considered opinion of a highly knowledgeable one.

But he was also a furriner at Harvard, so that must be it.

Schumpeter attributes other aspects of Keynes’s thought to his personal history.  The quoted line is in a section that argues that Keynes was a patriotic Englishman, and that his scientific and policy works were not so coincidentally closely aligned with Britain’s interests:

Like the old free-traders, he always exalted what was at any moment truth and wisdom for England into truth and wisdom for all times and places.

Ironic, isn’t it, inasmuch as Ferguson is a rather outspoken admirer of the British Empire?

The fact that Keynes married, and that his wife apparently miscarried, does raise questions about the theory that Schumpeter advanced and Ferguson repeated (if you assume the child was Keynes’s-quite a leap in itself).  But neither gainsays the fact that Keynes’s view was, clearly, focused on the short-run, and expressed virtually no interest in the implications of his policy recommendations for future generations.

This controversy raises the question: what is the point of the biographies of intellectuals, anyways, if there is no connection between their personal lives and their intellectual works? Unless such a connection exists, intellectual biography that explores private lives is nothing more than People Magazine for eggheads.  Keynes’ biographer Skidelsky goes into lurid detail about Keynes’s private life, and concludes that it was an important part of his worldview.  (Skidelsky puts forward some thoughts on the role of intellectual biography here.)  Skidelsky was able to document in such lurid detail precisely because Keynes recorded his exploits in such lurid detail.  It was obviously something very important to him.  Given this importance, is therefore hardly outlandish to suggest that there is a nexus between his personal life and philosophies, and his professional writings.

All that said, there is a difference between understanding-or at least conjecturing about-why Keynes wrote what he wrote and determining whether what he wrote is good economics or a good guide to public policy.  Making the latter determination is a matter of logic, mathematics, and empirical analysis.  If Keynes’s inspiration came from a ouija board, but turned out to be logically airtight and empirically validated, so what?  If it turns out to be logically flawed and empirically invalidated, what possible difference could its intellectual-or psychological-origins matter?  (I am in the latter camp, obviously, regarding Keynes’s work.)

I sense that the hysterical attack on Ferguson for his views on Keynes reflects the left’s view that Keynesianism must be defended at all costs, and anything and anyone that could raise any doubts about Keynes must be terminated, with  extreme prejudice.  Add to that the very PC urge to shout down anyone who dares express the view that sexual orientation could influence worldview in a negative way-the selfsame people are often quite willing to claim that it can affect it in a positive way.  So I guess orientation can affect thought and behavior, but only in a good way.  Uh-huh.

Note that the question to which Ferguson was responding was not about the theoretical rigor or empirical content of The General Theory.  He was asked to contrast Keynes’s philosophy with that of Burke.  He answered. You can find things that Skidelsky-an ardent admirer of Keynes-has written that would support what Ferguson said.

All in all, I consider this a tempest in a teapot.  I really couldn’t care less about the connection, if any, between Keynes’s sexual orientation and lack of progeny and his theories: what I care about is the connection between his theories and reality.  And that connection is very tenuous, in my view.

This tempest has all the usual roots of a faux controversy.  Ferguson is a bête noire on the left, notorious for his muscular, and at times brutal, advocacy of conservative (more properly, classical liberal) positions.  He said something that those who despise him can jump on.  And they are jumping on it, taking offense with relish.  (By the way, I find any criticism of an argument that focuses on its alleged offensiveness to be inherently subjective, often manipulative, and revealing of an inability to attack its substance.  Highly unpersuasive, in other words.  I’d also note that he gave the remarks at a conference put on by an investment firm, and I imagine that most of the audience was high net worth individuals and their investment advisors.  Supposedly-though the source for this obviously dislikes Ferguson-the audience was uncomfortable after Ferguson’s remark, and many were offended.  So much for the rich being right wing knuckle draggers with too much money.)

I was surprised and disappointed to read that Ferguson made a fulsome apology.  I seriously thought that he wouldn’t give a flying ‘f, and would in fact double down.  But perhaps it shouldn’t be surprising, given the history at Harvard.

I am counting down the seconds until the demands that he be banished from Harvard start flying, apology or no.  Liberal in Good Standing Larry Summers was defenestrated as Harvard President, for crissakes, of uttering a politically incorrect remark.  And this after he groveled.  If they can drive out the President of the university, and a former Treasury Secretary in a Democratic administration, eliminating the mere Tisch Professor of History, a conservative no less, should be child’s play.

While they’re at it, maybe they should posthumously de-tenure Schumpeter. But why stop there? For having the temerity to utter such a politically incorrect statement, by all rights they should re-enact what was done with Cromwell upon the Restoration.  You know, dig up his corpse, and draw and quarter it.  For what he said, he obviously deserves nothing less.

Krugman and others have been doing a victory dance, claiming that the Reinhart-Rogoff work on the relationship between debt and growth has been repudiated.  Hardly.  The R&R spreadsheet error (but I repeat myself) is embarrassing, but of minor consequence.  The other criticisms leveled by Thomas Herndon, Michael Ash and Robert Pollin are matters of judgment and interpretation, not definitive error.

James Hamilton has a balanced overview, as do Betsy Stevenson and Justin Wolfers.   Matthew Klein dissects the matter of New Zealand, which proves pivotal in the analysis.

Not surprisingly, Niall Ferguson is quite scathing in his criticism of Krugman’s gloating.  Ferguson just points out the obvious.  There is a limit to debt, and accumulation of too much debt leads to either default or inflation.  You can’t borrow a trillion (or about 6 percent of GDP) forever, or even for a modest period, without coming a cropper.

The most interesting part of Ferguson’s analysis draws an analogy I’ve used before: between governments and Enron.  (And Niall is nice, not pointing out that Krugman took Enron’s checks as an “advisor.”)  What do they have in common?  Hiding huge liabilities off balance sheet.  Well, that’s not really correct.  Governments don’t have proper balance sheets.  ”Government accounting” is something of an oxymoron.  But in the main, the point holds.  The debt that was on Enron’s books was only a fraction of its actual liabilities, and the official debt of the US government (and most governments, for that matter) is only a fraction of its (and their) actual liabilities.  Indeed, Medicare, Social Security, loan guarantees, and so on are so large compared to official debt that the US government makes Ken Lay and Jeff Skilling and Andy Fastow look like petty grifters.

So debating whether debt greater than 90 percent of GDP results in a substantial reduction in growth is really a sideshow.  The US is around that level now (somewhat over it when all government debt is counted, somewhat under it when only debt in public hands is)-but when you tote up only Treasury bonds, notes, and bills.   When you add it the off-balance sheet items, 90 percent looks like the epitome of prudence and thrift.

Of course the government has off-balance sheet assets too-like its taxing power.  How do you value that? (Which is perhaps one of the reasons governments don’t keep formal balance sheets.)  But that taxing power is not unlimited.  What’s more, due to the deadweight costs of taxation, it is precisely using that “asset” that can be a drag on growth.

All in all, though, when you consider the true state of US government finances and count all the liabilities, the academic debate over whether there is a growth threshold when debt hits 90 percent of GDP appears, well, academic.