If Paul Volcker had a hammer ...

According to NYT blogger Simon Johnson (Sloan MIT prof and former chief economist at IMF), former Fed chair Paul Volcker is going rogue on the Obama administration by pushing for much tighter regulation of the financial services industry. Although Volcker was originally going to be a senior economic advisor to the President, he has been eclipsed by Larry Summers and Treasury Secretary Tim Geithner. Now that financial services regulation is moving to the front burner in both the House and the Senate, Big Paul (he is 6'7" in case you wondered) has picked the perfect time to make his pitch.

Monday's WSJ had an interview with the former fed chairman where he shared the following insights: (1) forget CDOs, the most important financial innovation in the last 20 years is the ATM; (2) there are huge moral hazard issues; and (3) commercial and investment banks need to be separated. It will be interesting to see how Volcker's arguments influence the upcoming deliberations.

Is this the end?

NYT today reports that the European Union is dropping its antitrust case against Microsoft. Microsoft has agreed to give Windows customers a choice of 11 web browsers. Future users of Microsoft products will no doubt that the EU antitrust group for making the Windows installation process last a little bit longer.

Apple to re-engineer iTunes?

Potentially good news for iTunes customers -- last week WSJ reported that Apple is considering going to a web-based platform for iTunes. Confession: I received an iTunes gift certificate from my staff last year when I was in the hospital. My immediate thought -- I will never use this; they really should not have bothered. Trying to avoid any deadweight loss, I dutifully downloaded iTunes and made a purchase or two of things I was about to buy anyway. Then I got it -- no need to buy an entire album, no need to produce more paper and plastic, plus instant gratification (even Amazon takes at least overnight). I ended up burning through the gift quickly and now run a decent monthly tab while in the process discovering groups like Death Cab for Cutie, Kings of Leon and Portishead.

My problem, however, is that I have bought music on three different computers and it is not easy to keep all the selections synced with each other and the iPhone I purchased about eight months after getting iTunes. Why, I kept asking myself, haven't they figured out how to use the cloud to fix this? Now that Apple has purchased La La Media, which runs a web-based streaming audio business, service is likely to improve.

One would think that making customers happier with better service is totally noncontroversial. However, some antitrust economists and lawyers are already making noises about the anticompetitive consequences of iTunes gaining a larger market share of online music distribution services.

Mankiw on fiscal policy

Greg Mankiw's Sunday NYT column summarizes recent research comparing the size of the tax cut and government spending multipliers. The Obama stimulus to date has relied mostly on government spending; all indications are that the next round of "job stimulus" will be more of the same. Mankiw finds that most of the research shows that tax cuts generate a bigger bang per buck. This is contrary to what textbook Keynesian models imply. Mankiw cautions, however, that

economists should remain humble and open-minded when considering how best to fix an ailing economy.

Cooley on financial market regulation

Scary piece by NYU Stern School dean Thomas Cooley in Forbes today about the prospects for genuine changes in regulation of financial markets. Cooley points out that the draft bills in both the House and Senate exempt large portions of the financial sector from the proposed new regulations on consumer protection.

What are the major financial decisions made by households? The purchase of durables like automobiles and appliances, the purchase of homes and retirement planning. But the house bill H.R. 3126 exempts financing provided by automobile dealers, any person regulated by the Securities and Exchange Commission, any person regulated by a state insurance regulator, smaller banks and credit unions (those with $10 billion or less in assets), mortgage, title, credit insurance, real estate brokers and agents, attorneys and most retail transactions involving credit. The Senate proposal has fewer carve-outs but does exclude small banks and credit unions, merchants, retailers and other non-financial institutions that extend credit to consumers. So who is left to regulate?

Another area to watch is whether the final versions of the bill will allow the federal government the ability to break up the largest financial services companies into smaller components. Normally I am a free market sort, but as long as there is an implicit contract that the government will continue to bail out failed firms, there needs to be some mechanism to cap the liability.

What they fear more than anything else is losing access to the tremendous money pump they have at present. The large complex financial institutions, in case you haven’t noticed, are making money hand over fist. They are greatly enabled this by the fact that they have a very low cost of funds. Why? Because they have unpriced too-big-to-fail guarantees and access to the Fed. This means taxpayers are underwriting the low internal cost of funds that these firms have. They can turn around and invest these in their own proprietary trading, hedge funds and asset management businesses--things they're afraid of losing.

Friday's jobs report

Much encouraging news in the jobs report released last Friday. Most news reports focused on the very modest decline in employment (11k instead of 100k+). Other good news: unemployment edged down slightly from 10.2 to 10.0 percent; average weekly hours worked increased by 0.2 (so maybe some people are getting more overtime?); and temporary employment rose by over 50k. It is way too early to claim that the labor market has bottomed out, but this report was much more optimistic than any we have seen this year.

Data now show unemployment is highest since Great Depression

Confession: I had been holding out hope that unemployment in the current recession would not be higher than it was in the last severe recession of my lifetime 1981-82. I had taken solace in the fact that even at 10.2% in October, unemployment remained below its peak of 10.8% in late 1982. Yesterday's WSJ reports that the aggregate numbers really are not comparable because of changes in the labor market over the last 25+ years. Today's workers are more highly educated; there are more college graduates and fewer high school dropouts. Once you look inside educational categories, Princeton economist Hank Farber shows that unemployment rates are at record highs (at least since 1976 when the data series were created). For instance the unemployment rate for high-school dropouts is 14.9%, up from 13.6% in late 1982-early 1983; the rate for college-grads is 4.9%, up from 3.6%. A sad note on the day of the jobs summit.

Do extra MBA concentrations help job seekers?

Business Week online just posted an article with the provocative title "Business School Concentrations: Is More Better?" Full-time students at NC State have enough flexibility in their program to take two full four-course concentrations, and we have definitely seen a trend toward more students taking multiple concentrations even before the current recession. Although students might see a second concentration as an effective hedging strategy, recruiters are often not impressed.

"If you think about it from the recruiter's perspective, especially in a job market that's not particularly robust, the recruiter has more choice," says Julie Morton, associate dean of career services at Chicago Booth. "If I am a recruiter and I have more choice, I'm always going to home in on the student who is really gung-ho about my company, about my industry, and about this function of the job." An easy way for recruiters to sift through the increasingly competitive applicant field is to eliminate students without both academic course work and prior experience related to the job opening.

Price controls in Iran

Today's NYT has a front page article on Iran's debate about phasing out subsidies for gasoline. Despite being an exporter of crude petroleum, Iran has to import a large share of its gasoline because of insufficient expertise and capacity. Three immediate reactions: (1) Iran must realize that sanctions are on the way and that they need to start making adjustments now; (2) the subsidies are being withdrawn and replaced by a new scheme that tends to favor supporters of Iran's theocracy and penalize the mullahs' political opponents; and (3) most shockingly it shows that NYT news reporters understand basic economics:

There is widespread agreement that selling everyday goods at far below market prices, which costs the Iranian government an estimated $100 billion a year, makes little economic sense. It encourages over-consumption of gasoline and other products, discourages domestic production and makes Iran more dependent on imports, economists say. The subsidies are also regressive, because the rich pay the same artificially low prices as the poor and consume far more. And they encourage smuggling.

Maybe we will see the same understanding the next time NYT runs an article on the minimum wage or subsidies for "next-generation" fuels. Maybe not.