Felix Salmon

Anil Dash, of Expert Labs, is very excited about the latest government action on student loans, because he’s convinced that it was driven by the White House petition site he helped to set up.

Something remarkable happened here:

1. A regular citizen, not a lobbyist or politician or CEO, made a suggestion of a smart idea on the White House’s petition website.
2. That idea got promoted through social media, filtering its way out through Twitter and blogs and Facebook.
3. One month later the administration endorsed a variation of the idea, making it actual policy and helping over a million and a half Americans to have more money in their pocket at the end of the month.

Every time these milestones and successes are achieved, skeptics want to scoff. “Maybe this guy’s a plant!” “They’re only gonna accept ideas they already agree with.” “I bet most of the ideas are stupid.” “Why would they really listen to us?”

In this example, we see refutations of many of these objections.

This would be quite amazing and wonderful, if it were true. But it’s not true.

For one thing, it’s worth looking at the original petition, which got 32,008 signatures. Here it is in full:

Forgiving student loan debt would provide an immediate jolt to the economy by putting hundreds and, in some cases, thousands of extra dollars into the hands of people who WILL spend it – not just once, but each and every month thereafter – freeing them up to invest, buy homes, start businesses and families. This past year, total student loan debt finally surpassed total credit card debt in America, and is on track to exceed $1 TRILLION within the next year. Student loans themselves are responsible for tuition rates that have soared by 439% since 1982 and for saddling entire generations of educated Americans with intractable levels of student loan debt from which there is, seemingly, no escape. Relieve them of this burden and the middle class WILL rebuild this economy from the bottom-up!

This is pretty extreme stuff: both the idea that student loans have caused rising tuition rates — which seems to get things exactly backwards — and the idea that a trillion dollars of debt could or should simply be eradicated at a stroke. Yes, it would “provide an immediate jolt to the economy”. But it would do so in an incredibly inefficient way — if you’re going to do a $1 trillion stimulus, there are much better ways of doing so.

Yes, the idea got some traction — enough traction that Justin Wolfers felt the need to comprehensively demolish it in a piece headlined “Forgive Student Loans? Worst Idea Ever”.

So Anil’s first point is simply wrong. Yes, a regular citizen suggested something on the White House’s petition website. But it wasn’t a smart idea: it was a pretty stupid idea.

Anil’s second point is right — the stupid idea did indeed get promoted through social media. Social media can be quite good, it turns out, at promoting stupid ideas.

But what of Anil’s third point? Did the Obama administration indeed sign on to the Worst Idea Ever? No, it did not. Instead, it tweaked something called the income based repayment policy so that certain benefits will go into effect in 2012 rather than in 2014. And it allowed students to consolidate their federal student loans into one loan, to “give borrowers the convenience of a single payment to a single lender”. Which is nice, but hardly a big deal.

It’s a real stretch to call this “a variation of” the original idea, which called for student loan forgiveness. There’s no new forgiveness in the new announcements — and the old forgiveness is the kind of forgiveness which only takes effect after 20 years. Not exactly what “Robert A” of Staten Island had in mind.

On top of that, it defies credulity to suggest, as Anil does, that the White House announcement was in any way of form “crowdsourced policy”. Robert A’s suggestion — which, remember, had none of the elements of the policy that was eventually put into place — was uploaded on September 23; the new policies were announced on October 26.

Earth to Anil Dash: policies like this do not get hatched, implemented, and announced in the space of 23 working days. I can guarantee you that these student-loan proposals were in the works long before Robert A’s suggestion was made, and that they would have been announced anyway, even if the petition hadn’t existed.

It’s pretty obvious what happened here: the administration wanted to make it seem as though the petition site was having some useful effect, and so it took a policy it would have announced anyway, and declared that the policy was in response to some petition. It just didn’t do that very well, since the announced policy in fact bears almost no relation to what the petition was asking for.

So let’s not get cyber-utopian about crowdsourced policies: they haven’t happened yet, they’re unlikely to happen in the future, and insofar as they do happen, the crowds in question will not be virtual crowds on a White House website, but rather real crowds at places like Tea Party rallies or Occupy Wall Street. The internet is a good way of organizing people to turn up in person. It is not in any way an alternative to doing so, at least if you want to change government policy.

Some of the links today from Counterparties.com:

Why the ECB couldn’t save Italy even if it wanted to — WSJ

Echoes of pre-crash Japan in China today — Chovanec

The huge Chinese loan-sharking industry has lead to suicides and disappearances — Bloomberg

Some MF Global customers may have to “share cash” — Businessweek

Krugman: The return of secular stagnation — The Conscience of a Liberal

Bruce Bartlett: The Fed has an obligation to do more about unemployment — NYT Economix

Oil companies have ex-military “psy ops” experts fighting anti-fracking “insurgency” — CNBC

Goldman raised its lawsuit allowances thirty-fold — Reuters

Yelp is planning an IPO, at a $1 to $2 billion valuation — WSJ

And Raj Rajaratnam will pay a $92.8 million dollar penalty, or more than five Kardashian weddings’ earnings — Dealbook

Maple syrup is made by boiling down the sap of maple trees. Early in the season, there’s lots of sugar in the sap and it only takes 20 or 30 gallons of sap to generate a gallon of syrup. Because it hasn’t been boiled down very much, that syrup lacks intensity. Later on in the season, however, there’s less sugar in the sap and it can take as much as 60 gallons of sap to generate a gallon of syrup. And that syrup is much darker and more flavorful.

Obviously, more effort is expended generating each gallon of dark syrup than is expended on making the early-season light syrup. And the dark syrup tastes better too. So you’d expect it to be much more expensive.

And you’d be wrong.

Nick Rizzo went to Whole Foods in Union Square last night to get the numbers. The most expensive maple syrup on the shelves was, interestingly, the Whole Foods own brand — the 365 Organic line which ostensibly offers cheap, everyday prices. But the 365 Organic Grade A light maple syrup sells for $7.99 per 8oz jar — that’s $64 per half-gallon.

And “Grade A light”, remember, means the early-season stuff with the least maple taste or flavor.

If you stick with the 365 Organic line, the next one down is Grade A medium, at $9.99 for a 12oz jar, or $53 per half-gallon. Then there’s Grade A dark, where a 12oz jar is just $7.99. That’s $43 per half-gallon. And finally there’s Grade B — the tastiest of the lot, and the hardest to make — which comes in a 32oz jug for $19.99, or $40 per half-gallon. For good measure, it’s labeled “cooking”, just to hammer home the idea that this stuff isn’t designed for direct ingestion.

Other Grade B maple syrup at Whole Foods is even cheaper — a different 32oz jug was selling for just $11.99, or $24 per half-gallon. That’s just 37% of the price of the top-end stuff. I’ve been to Vermont; everybody there told me to buy Grade B if possible. Not because it was cheaper, but rather because it was better.

And some purveyors are working this out. At Amazon, the Shady Maple Farms Grade B is $32.89 for 32oz — a whopping $66 per half-gallon — while the Grade A is slightly cheaper, at $30.08.

But more generally, the trend is very clear: the lighter, cheaper-to-make, and less tasty maple syrup is also the most expensive, being presented lovingly in small glass jars rather than being moved in bigger plastic jugs.

And the maple syrup industry seems to be entirely complicit in this, happy to slap a “cooking” label on the really good Grade B stuff, which by rights should be its premium product.

This weirdly inverted state of affairs won’t last forever — under “new standardized grades and nomenclature”, the grading is going away. But for the time being, now’s your opportunity to take advantage of a curious historically-driven arbitrage. Grasp it!

Update: Apologies for betraying my European roots by not knowing how many ounces there are in a gallon. I originally was giving prices per gallon here; in fact, they were prices per half-gallon. Oops.

It’s important not to read too much into today’s mid-afternoon stock-market wobble. But in the wake of the news that Germany and France have been talking for months about creating a “core” euro zone with real fiscal union, markets sure as hell didn’t go up. And one anonymous diplomat gave a succinct explanation of why:

This will unravel everything our forebears have painstakingly built up and repudiate all that they stood for in the past sixty years,” one EU diplomat told Reuters. “This is not about a two-speed Europe, we already have that. This will redraw the map geopolitically and give rise to new tensions. It could truly be the end of Europe as we know it.”

I’ll go out on a limb here and guess that the diplomat in question isn’t German. But whoever it is, they have a point. There is no way that the European periphery will go quietly, resigned to their second-tier fate and their third-tier currencies. And without their consent, this idea is going to get very messy, very quickly. Even if it never happens, simply debating it could suffice to cause enough intra-European mistrust and vitriol that the markets simply cease lending to all but the very safest borrowers. And the ECB can’t lend to everybody.

Meanwhile, Silvio Berlusconi has turned himself into a lame duck, and is being as obstructionist as possible with respect to allowing his successor to do his job. In fact, it seems at the moment as though new elections won’t take place before February — which is far too long as far as impatient markets are concerned.

If you haven’t read it yet, you should really check out Mark Carney’s speech from last night in London, on the subject of global liquidity — something he describes as “the Keyser Söze of international finance”.

If you die, the proximate cause of death is always the fact that blood has stopped flowing to the brain. Similarly, if you’re in a crisis, the proximate cause of the crisis is liquidity, or rather the lack of it. You can be insolvent for as long as you like, so long as the money keeps flowing; it’s only when the money stops that things come to a head.

And we’ve reached the point, in Europe, at which the money has stopped flowing. Barclays has already declared that Italy is “beyond the point of no return”, and Greece hasn’t been able to fund its deficits either domestically or in the international markets for ages now. This is what happens in crises: the money stops, and then governments and central banks are faced with a choice. Do they step in, lending freely where private actors fear to tread? That’s the right thing to do if what you’re facing is merely a liquidity problem. But if it’s fundamentally a solvency problem, then layering on extra debt just makes matters worse.

And in Europe, of course, the governments are as likely to be part of the problem as they are to be part of the solution — if there is a solution, which is looking increasingly improbable.

All of which is to say that there are going to be many more days like this. Europe is becoming increasingly unpredictable: the crisis has claimed the scalps of two prime ministers in the past week, and they surely won’t be the last.

Martin Wolf says that the eurozone is unlikely to survive. Paul Krugman is saying the same thing. I’ve been saying it too. But one thing’s for sure: a euro breakup is emphatically not priced in to markets. So fasten your seatbelts: it could come sooner than you think.

Organic World has a series of charts about organic agriculture, from which these two stand out:

Clearly there’s a huge disconnect here — there’s basically no overlap at all between the countries producing the most organic food, on the one hand, and the countries consuming the most organic food, on the other.

What that means, in turn, is a real dilemma for the kind of people who want to eat local and organic. I’ve certainly noticed this at my local Whole Foods: you can eat local, or you can eat organic, but it’s very hard to do both. (And when you do, you pay through the nose for the privilege.)

I do wonder how this state of affairs came about — you’d think that demand for organic products would be felt locally, in the first instance. But I guess global agriculture is so global now that demand shows up first in places like Australia and Argentina, where land is cheap — even when domestic demand for organic food in those markets is very small.

And I also wonder how many of the restaurants who proudly source their produce from named farms are getting vegetables which are organic and local. My guess is that it’s not as many as you might think.

Most of the time, I consider it ludicrous that any member of the media ever bothers to interview the chief economist of the National Association of Realtors. It’s a paid-shill job, as its former occupant, David Lereah, now admits, and nothing coming out of the officeholder has ever been worth taking seriously.

On the other hand, sometimes the NAR’s chief economist says something so gorgeously and absurdly insane that it would be wrong of the media not to report it. And today is one of those days.

“Our members believe tinkering with the mortgage interest deduction at the high end will trickle down,” said Lawrence Yun, chief economist of the National Association of Realtors. “People view this as part of the social contract, as something that represents the American dream,” Mr. Yun said. “Therefore any changes are changes to the property rights of homeowners.”

Yes, he really said that: according to Yun, if we tweak or abolish the mortgage interest tax deduction, we’re directly attacking the property rights of homeowners.

Frankly, rather than making bonkers and obviously false statements about the mortgage-interest deduction, Yun should be much more worried about the future of jingle mail, or walking away. The same NYT section featuring Yun’s quote has two big articles about people who walked away from underwater mortgages: Carl Richard’s first-person account, and Tess Vigeland’s reported piece about homeowners who used YouWalkAway.com to do just that. All of them are much happier and financially healthier as a result of their action — and in fact I can’t think of a single article about someone who walked away from their mortgage and regretted doing so.

Homeowners and their self-appointed representatives, of course, hate the idea that other homeowners would act in such a way: it hurts their own property values. In fact, they hate the idea right up until the point at which they do it themselves, at which point they wonder why they waited so long to get this burden off their backs.

Walking away is a peculiarly American phenomenon, linked to the fact that many huge states, including California, have non-recourse mortgages. In Ireland, where many people are much deeper underwater, the default rate on mortgages has stayed surprisingly low, partly for social reasons and partly because all mortgages are recourse.

But the fact is that walking away makes perfect sense for millions of underwater homeowners, and that the banks are being incredibly short-sighted if they refuse to do principal reductions on the grounds that those homeowners will happily continue to pay their mortgage even when they have no equity in their homes and little prospect of ever regaining any. Because as the stories of walking away percolate in articles like these, the stigma will go away. And Americans will start actually doing, en masse, what has always been in their best interest.

In the immediate wake of the greatest financial crisis in living memory, Cooper Union looked like a genius. Remember this article by John Hechinger? Here’s the headline, if you don’t:

In particular, Hechinger credited a low-risk investment approach at Cooper Union.

The expansions stem from Cooper’s decision three years ago to ratchet back the financial risk in its endowment, enabling it to avoid the losses that have racked its peers. The college renegotiated a lease to lock in a future income stream from its key property, sold another parcel at a favorable price, raised its cash holdings and picked investment managers that hedged against stock-market declines.

Administrators say they wanted to be especially careful because of the school’s no-tuition policy, which leaves its budget largely dependent on investment income…

John Michaelson, who heads Cooper’s investment committee, said other schools could benefit from taking a lower-risk investing approach.

You know how this is going to end, don’t you.

As Cooper Union officials try to quell the uproar over news that the college may start to charge tuition, some students, alumni, faculty members and college trustees are advocating an inquiry into how the school got into such serious financial trouble.

One bit of the story stands out: it seems that the endowment was leveraging its bets with borrowed money — and has been doing so since 2006.

Cooper Union spent $166 million on a new academic building at 41 Cooper Square, replacing two outmoded buildings. To help pay for that and other projects, and to retire old bonds, it borrowed $175 million in 2006.

The college also invested $32 million of that borrowing in its endowment, calculating that the endowment investments would earn a higher rate of return than the interest Cooper was paying on the loan. That turned out to be a bad bet when the recession hit.

There’s still a lot of murkiness surrounding Cooper Union’s finances, which don’t seem to be quite as bad as the NYT — or, for that matter, Cooper Union president Jamshed Bharucha — is making out. The endowment is still near its all-time high, with the most recent number being $577 million, while the annual deficit right now is $16.5 million. You can call that unsustainable if you want — and Bharucha does — but there’s no immediate threat to the college here.

Certainly the financial situation at Cooper Union is murky: former president George Campbell Jr is quoted in the NYT as saying “that Cooper’s financial problems had always been well documented in public records like financial statements, reports on trustees’ meetings and his annual addresses on the state of the college”, but I can’t find any of those statements, reports, or addresses on Cooper’s website. Guidestar has the 2009 Form 990, but it’s a bit out of date, and it’s not easy to understand — especially the $319 million in liabilities, including $175 million in “secured mortgages and notes payable”, which help result in total annual interest expenses of more than $10 million. (Salaries and wages, by contrast, the only larger item on the expense statement, are $22 million.)

So I’m very sympathetic to calls for an audit at Cooper Union. There’s no reason that the college’s finances should be this opaque — and the idea of creating a “task force” to investigate options seems designed to ensure that a lot of that information remains confidential. At the very least, the task force should be charged with putting together a detailed history of Cooper Union’s finances right up to the present day, and making that history public for all to see. Otherwise, it’s going to be hard to believe anything we’re told about what’s going on there.

World faces subpar growth for the next 14 years, Conference Board says — WSJ

“Italy is at the brink of being unable to afford to borrow in the public markets” — WSJ

SEC is shocked to learn that banks continue to break the law after promising not to — NYT

Wall Street bonuses are set to fall up to 30% — Dealbook

FHA loans for low-income homebuyers are increasingly going to the wealthy — Bloomberg

Michael Lewis on “The King of Human Error” — Vanity Fair

The text of the NYT vs. Huffington Post “Parentlode” lawsuit — Scribd

How Bill Daley and Washington Elites misread America — New York Magazine

David Dunlap took a visit to the Bronx, and came back with a 13-page slideshow of John Thain’s self-aggrandizement:

The generosity of John A. Thain and his wife, Carmen, in helping rehabilitate the forest has been rewarded with its renaming as the Thain Family Forest. The new name has also been worked into the text of almost every sign…

One expects donors’ names at entrance ways and on directional signs and maps. It’s more unusual to find donors’ names woven into the interpretive narration. At the garden, however, the words “Thain Family Forest” are slipped into signs about black oaks, hemlocks and hillside blueberries (“a favorite of birds and small mammals in the Thain Family Forest”); about vernal pools and great horned owls; about mound formations and forest layering; and even about snags, as standing dead trees are called, which help “reveal the Thain Family Forest’s great age.”

They turn up on prohibitory signs, too. “Please Stay on the Path: The Thain Family Forest is a fragile ecosystem.”

Indeed, by the time you reach the sign beginning, “When a tree falls in the Thain Family Forest —,” you may be tempted to finish the thought yourself, “— does it make a Thain Family Sound?”

A spokeswoman for the New York Botanical Garden tried to say, with a straight face, that the Thain family did not request that the forest be named at all; that the Garden “named it as a thank you for their gift”; and that the ubiquity of the Thain name was simply a function of a “scrupulous interpretive specialist”.

You’re welcome to believe her, if you want. But I’m quite sure that John and Carmen Thain could have declined the Garden’s generous offer to ensure their name was used on first mention every time the forest is mentioned. Or even to use their name at all.

After all, the whole point of this forest is that it dates back to the 17th Century. It’s being carefully managed with Thain funds, which I’m sure have been put to good use. But there’s something vulgarly presumptuous about a Wall Street plutocrat playing happily along with the idea that he and his family should get enormous amounts of public credit, in perpetuity, for what is essentially the same forest where Lenape Indians hunted.

But of course we’re talking about John Thain here. He of the $35,000 commode on legs, and the $87,000 office rug. You’d think he’d have learned his lesson about his displays of wealth having quite the opposite effect to that originally intended. But obviously not.

A lot of the coverage of the Census Bureau’s new Supplemental Poverty Measure treats it as a bit of a wash — child poverty down, poverty among the elderly up. But for me the big news is that America’s safety net isn’t working.

The old poverty measure — which is still the official measure — excluded a lot of the programs designed to reduce the effects of poverty — things like food stamps and the Earned Income Tax Credit. On the other hand, it also excluded things which increase the effects of poverty, like payroll taxes, transportation costs of getting to work, and childcare and healthcare costs.

Put the two together, and you get the changes spelled out in the chart above. There are more people living in poverty than we thought — 16% of the population rather than 15.2%. A lot of people didn’t take the urgency of America’s poverty crisis seriously, given the old methodology, because they reckoned the “real” rate was lower, once you took into account things like the EITC. But it turns out that in reality, the poverty rate is even worse than we thought — much worse, in fact.

It’s true that the poverty rate for children has come down — but it’s still unconscionably high. There are 13.6 million children under the age of 18 living in poverty — that’s 18.2% of all the children in the country.

And most egregiously, even after taking into account food stamps and the like, 5.4% of the population — and fully 8.6% of the Hispanic population — is living on less than half the poverty level.

What does that mean, in practice? Here are the new poverty levels:

To live on less half the poverty level means that a family of four — two adults and two children — would have a total household income of no more than $12,172 per year. Call it $1,000 per month. And that’s after accounting for aid from the government.

Is it possible to feed and clothe and house four people on $1,000 a month? Evidently it is, because millions of Americans do. But I certainly wouldn’t want to attempt it. And it can’t be good for the kids in such families.

Up until now, I thought that the US social safety net, such as it is, was at least managing to catch people at the very bottom of the distribution. If you were earning less than half the poverty level, you’d be looked after somehow. But in fact, fully 80% of the ultra-poor in the official poverty statistics stay in the same place when you look at the new numbers. And that’s just unacceptable. As politicians try to compete for areas to cut spending, let’s at the same time try to increase the amount of aid going to the country’s poorest, through food stamps and Medicaid and the like. Because if America really aspires to be the greatest country in the world, it can’t have 16.1% of its population living in poverty.

Sometimes the conventions of dead-tree newspapers are much more effective at getting a story across than the same article on a website. Landon Thomas’s 1,100-word piece on George Papandreou is a case in point: you can work through the whole thing, or you can glance at it in the paper, where a pair of sub-heads do the job rather effectively. “Prime Minister Lacked Forcefulness” says one; the other tells us that “a leader proved unable to connect with constituents.”

Meanwhile, a similar prime ministerial ousting seems to be taking place in Italy, where the highly forceful Silvio Berlusconi — a man who connects viscerally with his constituents — looks as though he might get pushed aside in the national interest much as Papandreou was.

What we’re seeing here is the crucial role that national leadership has to play in sovereign debt crises. There have been questions over Italy for a while, but conventional wisdom has generally had it as being either the third or the fourth of the PIGS dominoes to fall. Instead, it now looks as though it’s falling so fast it could even, conceivably, overtake Greece.

The amorphous blob known as the “international community” — as represented by the likes of the ECB, the IMF, and even the US Treasury — is playing a dangerously technocratic game in Italy, largely oblivious to the enormous tail risks involved. The general idea seems to be that Berlusconi is a massive liability, but that underneath it all, the fiscal program he’s being forced to agree to is a good one. Kick him out, install a more professional technocrat, and all should be fine.

But just look at Greece, and the fate of Papandreou — the very model of a modern professional technocrat. When the populace is revolting and the government is imposing tough choices on its citizens, you need someone in charge who can do more than navigate committees and corridors in Brussels and Washington. In fact, that kind of thing is best delegated to finance ministers and central bank governors. The leader of the country has a much more important job — which is to lead the country.

I’m thinking here of Brazil, which managed to come out of its own debt crisis, in 2001, thanks to some very smart and able technocrats at the finance ministry and central bank. But — and this is crucial — it was also led by a popular and charismatic leader, who managed to persuade the country that he was acting in its best interests. There are many people who deserve credit for the fact that Brazil avoided default in 2001-2, but Lula — an uneducated union leader without a technocratic bone in his body — has to be at the top of the list.

At the same time, and crucially, Lula had the full support of the international community in everything he was doing. At no point was any entity as powerful as the ECB or the German government using sticks, threatening to force him into default if he didn’t do what they wanted. Everybody understood that their interests were aligned, and that it would be best for all concerned if they tried as hard as possible to work with rather than against each other.

And this is why the current Europe crisis is looking so bad. Interests aren’t aligned at all: everybody wants to push the costs of the crisis onto someone else. And in the past couple of weeks, things have gotten significantly worse: the northerners have started quite explicitly threatening the southerners with a lack of cooperation and the consequent inevitable default if they don’t pick up their game.

This is a strategy which is almost certain to end badly. It can work in the short term — but only in the very short term. Because if the markets think there’s a serious risk that the Eurozone powers might let Italy fall, then they will simply walk away. And suddenly the entire burden of financing Italy’s budget deficit for the foreseeable future will fall on the ECB, Germany, and the rest. Which is a situation which is simply unsustainable.

Or, to put it another way: Europe has a leadership problem raised to the 17th power. One weak or bad leader — Papandreou, or Berlusconi — can suffice to hole the euro project below the waterline. But parachute in the best of all possible leaders into Greece and Italy, and you still have a problem. There’s Germany, and France, and the ECB, and even the likes of David Cameron and Tim Geithner meddling where they’re not really welcome. And the only way that this crisis can work itself out effectively is if they all agree on the same solution.

But the essence of leadership is, well, leading. It’s not simply agreeing to do the same thing that the other 16 guys want to do. In Brazil, Lula set the course, and the international community — as well as his own technocrats — implemented it and made sure it worked. There was no doubt who was in charge. In Europe, no one has a clue who’s in charge, and 17 different people all want to set the course. Which means, I fear, that it’s doomed.

I’m very much enjoying ISDA’s media.comment blog — corporate blogging done right, with attitude. Its latest broadside is directed against Gretchen Morgenson, who spent the first half of her column this weekend railing against the dangerous nature of MF Global’s “bad derivative bets” and “complex swaps deals”.

Now MF Global was a broker-dealer: of course it had a derivatives book and entered into swaps deals once in a while. But Morgenson is talking here about the European sovereign debt deals which ended up sinking the firm — and those deals didn’t have anything to do with derivatives. Here’s ISDA:

MF’s European sovereign debt holdings were just that, bond positions financed via repo transactions. Repos, of course, are NOT OTC derivatives. (They’re also not listed derivatives.) They are basic tools of corporate finance commonly used to finance cash bond positions.

We would have thought that, with a little checking, this point would be pretty obvious to one and all.

Obviously, ISDA wins this particular argument: it’s right, and the NYT is wrong. But don’t hold your breath waiting for a correction: Morgenson is one of those reporters who sees CDS beneath every rock, and even blamed CDS for Greece’s fiscal problems — twice. Neither of those columns received a correction.

In the Greece case, Morgenson saw CDS when she was actually looking at currency swaps, which are at least derivatives. In the MF Global case, she’s seeing CDS when she was actually looking at bog-standard repos, which aren’t derivatives at all.

But here’s the thing: the really annoying part of this episode is not that Morgenson is wrong. It’s that with a little bit of honesty and a little less derivaphobia, she might actually be on to something.

Here’s Morgenson:

MF Global’s debacle was a result of complex swaps deals it had struck with trading partners. While those partners owned the underlying assets — in this case, government debt — MF Global held the risk relating to both market price and default.

These arrangements at MF Global underscore two big problems in the credit derivatives market: risks that can be hidden from view, and risks that are not backed by adequate postings of collateral.

And here’s ISDA:

Because MF Global was an SEC registered Broker-Dealer and CFTC registered Futures Commission Merchant, regulators at all times had full transparency into the nature and extent of MF Global’s trading and risk positions.

In short, there were no derivatives, no opaque financial instruments and no hidden risks in the story of MF Global’s downfall.

If you simply delete the terms “complex swaps” and “credit derivatives” from Morgenson’s column, here, she’s actually right, while ISDA’s statement is a little misleading. This is the tragedy of Morgenson: because she’s incapable of getting her facts straight, she needlessly destroys arguments which are fundamentally sound.

MF Global did indeed hide its European sovereign risk from view — it was held off balance sheet, for no good reason. ISDA is, narrowly, right when it says that regulators knew exactly what MF Global was doing — but investors certainly didn’t. And so, contra ISDA, it’s entirely reasonable to consider MF Global’s European bond position to be a “hidden risk in the story of MF Global’s downfall”.

The real problem at MF Global wasn’t CDS, of course, or even derivatives — as ISDA points out, those were non-issues. Instead, it was simply leverage. It’s possible to get overlevered using CDS — just look at AIG. On the other hand, it’s equally possible to get overlevered the old-fashioned way, using nothing but simple repos. And that’s what MF Global did.

Regulators are on this, pretty much. They’re forcing banks to bring their off-balance-sheet deals back onto their balance sheets. And if you’re covered by the Basel agreements, you’re going to be limited as to how much leverage you can take. MF Global had too much: when it became a risk-taking investment bank, rather than just a broker, it should have had its leverage curtailed much more than happened in reality. So there was definitely a regulatory failure here.

But the fact is that MF Global was small enough to fail, and it’s not regulators’ job to prevent people like Jon Corzine from gambling away billions of other people’s dollars. If he couldn’t do that at a bank, he’d probably just do it at a hedge fund instead.

There will always be risk in the markets — without risk, markets are nothing. It’s good to regulate that risk, so that it doesn’t get out of hand, in whatever form it takes. But let’s not kid ourselves that the risk is always in the form of credit default swaps. CDS didn’t bring down Bear Stearns, or Lehman Brothers, or Washington Mutual, or Wachovia, or for that matter any of the Icelandic banks, or RBS, or Fortis, or now Dexia. Or MF Global. Which is why it’s important to concentrate on the things which do cause systemic risk, rather than simply blaming CDS all the time.

Update: Matt Levine has an interesting response, where he does that thing that derivatives wonks do, which is see everything in terms of derivatives. This is an interesting exercise! And it can be applied to, pretty much, anything at all — not just repos, but also stocks, bonds, mortgages, houses, ETFs, you name it.

Matt’s point in this case is that the repo-to-maturity wasn’t simply a repo to maturity: it was a repo to maturity if the bonds matured on time, but it was a repo to the default date if they defaulted before maturity. And so there’s language in the repo contract which references various actions which have to be taken in the event of a default. And so therefore you can consider the repo contract a kind of default derivative, just like a CDS.

On the other hand, every single contract in financial markets has some kind of “if A then B” language in it. And although derivatives types like Matt love to think about that language in terms of derivatives, you need to be very comfortable and sophisticated when it comes to thinking about derivatives in order for that kind of analogy to be helpful. And as Matt would surely agree, Morgenson isn’t. For that matter, her readers aren’t, either. So while such material can be interesting on wonky blogs, it really has no place in the NYT.

Some fresh links available, as always, on Counterparties.com:

“The eurozone decouples from the world” — FT

Namibia’s bonds are now safer than Italy’s — The Globe and Mail

MF Global clients have “zero clarity” about their missing cash — Reuters

NY Fed: The repo market still has “potentially systemic” risks — NY Fed

The wealth gap between young and old Americans is at a record high — Pew Social Trends

22.4% of young male high school graduates are unemployed — WSJ

The most remunerative college majors — WSJ Real Time Economics

Malcolm Gladwell: Steve Jobs was more “tweaker” than inventor — New Yorker

Great headline: “Greenwich lean time” as hedgies ditch CT real estate — NY Post

And Robert DeNiro will be playing Madoff in an HBO film — The Hollywood Reporter

George Papandreou is Davos Man, literally: he’s been there for the past couple of years, and even if he steps down now I suspect we might see him up the alp in 2012, too. Matt Yglesias reckons this is bad for the Greeks:

At the end of the day, had Greece played chicken and insisted on a better deal, I think the Germans would ultimately have paid up…

That it’s playing out this way is, I think, an example of a benign consequence of the rise of the global ruling class. The leadership of a small upper-middle-income country is willing to do something unpopular and likely contrary to the interests of its population for the sake of the greater good. Still, as a structural matter I think it’s a fairly disturbing trend.

It’s definitely possible for national leaders to act in the best interests of Davos, rather than in the best interests of their own country. Or, rather, to kid themselves that what’s in the best interests of Davos is in the best interests of their own country. Exhibit A is probably the 2008 decision by Irish finance minister Brian Lenihan to guarantee all the debts of Ireland’s banks — although ultimately that decision hurt the entire Eurozone much more than it helped a relative handful of Irish bank creditors.

As for the decision by Greece’s leaders to close ranks and refuse to allow the Greek populace to throw a spanner in the works of a bailout, it’s certainly possible to see this — as Yglesias does — as a capitulation to Germany and the international community. On the other hand, it’s easier to see it as a way of cutting off some very nasty tail risk. Even if Yglesias is right and the Germans would ultimately have paid up, there’s a significant non-zero possibility that they wouldn’t have done, and the whole situation would have ended up collapsing, with Greece getting nothing. And that would have been disastrous, not only for the eurozone but especially for Greece.

More generally, it’s really hard for a country to play chicken with its lenders when it’s running a massive primary deficit. In fact, I can’t think of a single case where that ever happened. Greece needs Germany more than Germany needs Greece, both of them know it, and Germany is looking increasingly willing to cut Greece off if it refuses to cooperate.

The only way for Greece to get real negotiating leverage over Germany would be to start running a primary surplus, thereby giving itself a credible threat in terms of simply repudiating its sovereign debt. But of course running a primary surplus would require significantly more austerity than even the riot-inducing policies currently in place. For the time being, Greece finds itself in the same position as most distressed debtors — ceding control and authority to its creditors. That might not sit well with Greece’s proud citizens. But it’s a natural consequence of borrowing so much money from other European countries and international banks.

It’s been over two years since my last flurry of enthusiasm for the Baker-Samwick own-to-rent proposal, and over four years since the op-ed from Dean Baker and Andrew Samwick first published in August 2007. It’s been so long, in fact, that it seems to have disappeared from the Providence-Journal website; fortunately, Dean Baker has mirrored it here.

The idea is very simple, and is based on the idea that there’s a difference between foreclosure and eviction. A bank can foreclose on a house, and seize it and/or sell it to settle the mortgage. But once that has happened, there’s no need to kick the homeowner out of the house. Instead, rent the house back to the homeowner at market rates. This keeps people in their homes, reduces foreclosure sales, stops houses being trashed when they’re foreclosed upon, and even maximizes the income stream from homes in default on their mortgages.

Since then, a couple of interesting things have happened.

For one thing, despite the fact that legislation along such lines has gone nowhere, independent actors have started putting it into practice on a case-by-case basis anyway. Elyse Cherry of Boston Community Capital has an op-ed explaining her scheme, called Stabilizing Urban Neighborhoods, which seems to be going very well. And Jorge Newbery, of American Homeowner Preservation, tried his own version of the plan, which involved negotiating short-sales with individual banks and giving homeowners the option to rebuy their homes. When banks refused to cooperate, he moved on to Plan B, which involves buying up pools of distressed mortgages himself, and then working them out with himself as the mortgage holder. That has been so successful and profitable that he’s setting up a socially-responsible hedge fund designed to do these workouts at scale.

Now comes word that Greg Lippmann, of all people — one of the big winners of the subprime bust, and a man who became extraordinarily wealthy playing in the mortgage CDS market — is thinking along similar lines himself.

“Principal reductions are necessary to help ameliorate the housing crisis,” Lippmann, chief investment officer for New York-based hedge fund LibreMax Capital LLC, said in an Oct. 31 letter to investors obtained by Bloomberg News. The step will also lower losses on loans underlying mortgage bonds, he said.

In other words, Lippmann sees what’s pretty obvious — principal reductions are not only helpful but necessary if the housing mess is going to clear. The question isn’t whether they’re going to happen, it’s how they’re going to happen.

After all, every foreclosure or short sale is, in its own way, a principal reduction. And FHFA chief Ed DeMarco, a steadfast opponent of principal reductions, is pushing instead plans where foreclosed homes are turned into rentals.

So it’s really not much of a stretch to put the two together, and just add the minor twist that the person who ends up renting the home should be the same person who used to own it.

Yes, there is a little moral hazard here — it is possible that people who would otherwise remain current on their mortgage will now happily default on it instead, safe in the knowledge that they can simply rent their home after they default, with lower monthly payments.

It’s possible. But the fact is that foreclosures and evictions themselves are much more hazardous to the housing market than an entirely hypothetical moral-hazard problem on the part of homeowners who have diligently been paying their mortgages for the past three years. Mass foreclosures, along with the subsequent fire-sales of distressed property, devastate real-estate values; anything which can bring those numbers down is going to be good for the housing market.

So let’s try this one more time, shall we? If red-in-tooth-and-claw capitalists like Greg Lippmann think that principal reduction is a good idea whose time has come, maybe even Ed DeMarco — who acts, after all, on behalf of all Americans — might come round to the idea, one day.