Author Archives: Chris Chegash

Defining Insider Trading

Recently there have been a slew of insider trading probes and lawsuit against Wall Street traders.  The recent surge of cases has lead to some interesting questions regarding what is and isn’t insider trading.  The case at the center of the questions is a 2012 case against two traders, Todd Newman and Anthony Chiasson, who were convicted of insider trading.  They have since appealed their conviction on the grounds that they received their non-public information not from the original leaker, but indirectly through a network of analysts.  They claim that since they didn’t know the the original source personally benefitted, they didn’t commit true insider trading.  There are other cases waiting on this appeal to provide more legal clarity about what should be counted as insider trading.

The above case is certainly not a cut-and-dry case of insider trading.  Some cases are easier to determine.  For example, a BP employee recently agreed to pay over $200,000 to settle an insider trading charge relating to the 2010 BP oil spill.  In this case, the employee had access to private information on how much oil was leaking, and responded by selling off a large amount of shares anticipating a huge drop in BP’s stock price.  BP stock lost 48% following the oil spill crisis, saving the man and his family hundreds of thousands of dollars.

The presence of intermediaries between he original leak and  Newman and Chiasson acting on the information makes their case more foggy when it comes to determining right from wrong.  When a trader gets a piece of information from an analyst, how are they supposed to determine if that information was truly private.  Firms have been known to intentionally leak information, and therefore it can be difficult for a trader to determine what is really private information and what isn’t.  If the trader doesn’t act, they are mission out on lost profits on information that wasn’t actually “insider”.  Not to mention that if many people know about a leak, the information ceases to really be insider.  As one organization put it, “At some point, a leak of nonpublic information about a company’s anticipated results…becomes just one more piece of market intelligence that is circulating among analysts and portfolio managers.”  When does proprietary information become public?  If that line isn’t clearly drawn, I believe that honest people search for profits could be punished for something that isn’t insidious at all.

On the other hand, if a trader know they have information that is non-public, one might argue that they just simply shouldn’t use that information to their advantage because it is wrong.  However, I don’t really think that this is a plausible solution.  Once someone knows a piece of private information, they know it, and cannot un-know it.  Regardless of their desire of whether or not to use that information to their advantage, that information can guide other decisions they make without them really even knowing.  I think its not too far of a stretch to believe that a lot of traders make a lot of indirect insider trades without realizing it.

Furthermore investing, at its core, is about having a more accurate idea about a firm that the next person.  But at some point, the government has said that having too much information should be illegal.  I agree that there are many instance where insider trading feels wrong and that a select few are talking advantage of a much larger shareholder base, I’m not sure I believe that insider trading is as odious as some make it out to be.

 

(Revised) Michigan’s Road Problem

One of the sure ways to know that something is important is when politicians actually agree on something.  With the current state of American politics, both conservatives and liberals rarely agree on anything.  Yet, when it comes to the current state of the infrastructure in Michigan, everyone seems to agree: The roads in Michigan are awful.

I grew up thinking that the thump-thump you hear when driving down the highway was normal, but as I’ve grown older, I’ve realized this isn’t true.  Sad as it is to say, I don’t mind when I cross the Ohio border and finally get some peace and quiet while driving.  The data about Michigan’s roads backs this up.  The American Society of Civil Engineers gave Michigan’s infrastructure a D in 2009, 2011 and 2013 (they gave the U.S. a D+ nationally).  According to the ASCE, about 30% of the bridges in Michigan are either “structurally deficient” or “functionally obsolete” and 38% of Michigan’s roads are in either poor or medicare condition.  More importantly, they believe that the poor conditions of the roads in Michigan costs the average motorist an additional $357 dollars per year in car repairs and traffic problems.  Some people fear that poor road conditions could drive both new business investment and tourism away.

The fact is that all roads face some deterioration over time, and will need to be replaced eventually, but Michigan has two key factors that enlarge this problem.  The most obvious factor is the weather.  Driving around in the past few weeks has been an absolute nightmare in Michigan; potholes are everywhere as a result of an extremely cold and snowy winter.  When water seeps into cracks and later freezes, it expands and enlarges the cracks.  This is why the potholes have been especially prevalent and dangerous after this prolific winter season.  The second major factor that causes increased wear and tear on Michigan’s roads is a poor public transportation system.   The most often cited cause for a subpar public transit system in Michigan is the local interests of the major car manufacturers.  Since better public transit means less cars, the major car companies like Ford, GM, and Chrysler all have an interest in opposing public transit.  Over time, this has lead to woeful public options in Michigan (Ann Arbor is probably far better than most areas).

The real question lies in where the money to fund road improvements will come from. In 2013 Michigan governor Rick Snyder proposed a $1.2 billion increase in road funding, funded through either an increase in the gas tax and other fees, or an increase in the state income tax. The Michigan Infrastructure and Transportation Association thinks the true cost of fixing Michigan’s roads is around $2 billion per year in additional funding, far more than the number governor Snyder has proposed (there are some great graphics in the full report here) . However, the proposals in the Michigan legislator fall well short of that funding level, there are new proposals in state Congress to increase road funding by $450 million per year.  The additional funding would come from diverting 1% of our of Michigan’s current 6% sales tax to roadwork andthrough eliminating the flat gas tax and instead taxing it at 6%.  Thus, if prices rise higher than $3.55 per gallon, the tax will be more expensive than the previous 18 cent per gallon tax.  Proponents of this tax are eager to point out that a gas tax makes people who drive more pay more in taxes, which seems smart.

This proposal has two major issues:

  1. No tax increase: Lawmakers have apparently found about $400 million dollars to take from other parts of the budget, because actual revenues are expected to increase by only about $50 million.  This proposal means some other project is losing $400 dollars
  2. Not enough funding: The amount of new funding is still well short of the additional funding governor Snyder pros posed and is well short of what experts think is necessary to solve this problem.

Another option that people frequently talk about is the use of toll roads to generate revenue.  Unfortunately, most of Michigan’s highways aren’t eligible to be used as toll roads.  Since the federal government funded a significant portion of the costs of state highways, those roads cannot be used as toll roads without repaying the government for their original investment.  Although there are some ways around these rules, trying to convert Michigan’s road into toll roads wouldn’t be financially viable.

The problem of poor roads isn’t going away any time soon, and so lawmakers must act to better fund the roads in Michigan; waiting will only make the roads worse.  Although difficult, I believe that residents must accept a slight tax increase in order to improve Michigan’s dilapidated road network.

 

The Murky Waters of Dark Pools

Recently, an article in the WSJ about Goldman Sachs recent strategies had a long section about “dark pools.”  Although I had heard about them briefly, I didn’t really understand what exactly they were, and so I decided to read a bit more about them and learn what they were and how they operated.  The resulting blog post is what I found.

A dark pool is essentially an alternative market where firms can trade with orders that are unavailable to the public market.  On these markets, firms are able to trade more anonymously; when they set and order, others who are in the dark pool can see that someone has placed an order, but cannot tell the position of the order.  This is often used when institutional investors want to move large amounts of an assets without changing the price in the market.  For example, if a large firm like Goldman Sachs wanted to buy a large amount of a certain type of asset, the price of that asset would shoot upward as they repositioned themselves.  However, if they made the purchase in a dark pool, they could buy at a lower price, and the transaction would hit the public books only after the purchase was complete.  Although relatively unknown to laypeople, a substantial portion of trades (12% in 2012, and rising).

Dark pools also play an important role in the current high-frequency trading controversy.  HFTs buy access into Wall Street bank’s dark pools, and then use their access to this private to benefit themselves.  HFTs will send out many small orders to these dark pools, fishing for a counterparty.  If an order gets executed, then the trader can guess that the large firm is taking a larger position that they cannot see.  When a HFT makes this inference, they then take the same position on a public market.  When the large firm’s order is filled in the dark pool, the transaction moves the asset’s price in the market in the way that benefits the HFT.  They pay a fee to have access to these banks dark pools, so both sides end up winning.  In Flash Boys, Michael Lewis argues against this strategy, commonly called “front-running”.

In 2012, Pipeline Trading Systems was accused of front-running people who made orders with their affiliate, and eventually was shut down after pressure from the SEC.

Dark pools seem to be queer bit of financial engineering.  They reduce the amount of information a typical market participant knows about the demand for an asset at any given time, because they don’t have access to who is trying to buy what in dark pools.  Dark pools seem to be a way for large firms to circumvent the market forces of supply and demand in order to buy lower and sell higher than would be possible on the open market.  I understand that someone making a large investment position change doesn’t necessarily want to broadcast it to the rest of the world, but I’m not sure if dark pools are the solution.

 

WiFi in Africa

Imagine if you had WiFi on the bus on the way to work.  How would you use your time differently?  While for most American’s, the answer is “no much differently”, for Africans who seldom, if ever, have an Internet connection, an hour or two of Internet connection on the way to work could profounder alter that way they communicate.  For some Africans in Kenya, WiFi on buses is becoming a reality.

The numbers are truly quite astounding: only 16% of Africans use the Internet, included 50% of Kenyans.  This is in contrast to the 15% of Americans who don’t use the Internet according to a recent Pew study on the topic.  The same study indicates that just 4% of Americans can’t afford or don’t have access to the Internet (which although quite small still seems high to someone like me who uses the Internet all the time.)  Only 32% of Asians use the internet, making it next-to-last in internet connectivity.

As a generation that has grown up in the Internet Age, I think we sometimes forgot how essential the internet is in our everyday lives, and how many little things it does for us.  We use it as a calculator, a map, a dictionary, an encyclopedia, an entertainment source, and a place of commerce.  For African’s, even internet with limited bandwidth could give them access to Google Translate, allowing them to communicate with those who speak a different tongue.  With the recent rise of Massive Open Online Courses (MOOCs), Africans with internet access have access to a large amount of education resources that could bring them out of poverty.  Frankly, for a society that is many years behind our own technologically, the Internet really serves as a great equalizer of knowledge and technology.

The undeniable fact is that the internet is a powerful tool, and the worldwide marketplace that it creates had spurred business development across the globe over the past quarter century.  Unfortunately, many Africans cannot afford what most Americans see as a necessity.  In have stepped many of the technology giants: Facebook, Google, IBM, and Intel have all begun work to make phone and internet service cheaper in Africa.  Whether out of altruism, or in order to plant seeds for economic prosperity in the future, these companies are helping to bring many Africans into the Internet age.

Google has taken a particular interest in connecting Africa to the Internet, and even has its own blog about their progress in the Sub-Saharan region.  Perhaps their grandest idea is Google Loon, a project that would use balloons floating above the continent to bring WiFi to people all over Africa, or even the globe.  Although Loon might not be a reality in the near future, this kind of innovative approach certainly gives a fresh take on how to provide people everywhere with the Internet.

As someone who has grown up in what is an increasing global age, where commerce stretches across national lines like never before, an improvement in technology, even across the globe, will lead to a more efficient economy, and more worldwide economic equality.  Africa, the continent that really lags behind the rest of the world (and has for a long time), is about to have their time on the world stage in the next century, and at the center of Africa’s technological revolution is the Internet.  If, or when, the majority of Africans have access to the Internet, I believe their economies will start to flourish like never before, and that day will be a great day not only for Africa, but for the entire world.

 

 

Pension Tension

America has a pension problem.  Lately, lawmakers all over the country, in places like Rhode Island, Detroit, and Chicago are hammering out decreases in pension benefits for retirees despite opposition from unions and pensioners alike.  For a variety of reasons, like increasing life expectancy among retirees, eroding tax bases, and the most recent recession, these pension systems have become severely underfunded.  In this post, I will detail some of the problems with pensions, both in general and in these specific cases, then I will discuss the strategies that some states and businesses are using to cover these liabilities.

One of the major problems with public pensions is that they simply pay too much.  According to a recent WSJ article, state pay their retirees retirement incomes that are too generous.  Before recently filing for bankruptcy, Detroit piled up an astounded $18 billion in debt.   At least half of that $18 billion is owed to retirees in the form of a defined benefit pension or retiree health care costs.  Although early indications point to Detroit’s pensioners recovering more of their obligations than other creditors, pensioners will still have their benefits cut by as much as 34% and receive few, if any, cost-of-living adjustments.  One major factor that caused that underfunding of Detroit’s pensions was a sharp decrease in the cities tax base.  The threat that of decrease in revenues highlights too drawbacks to a defined-benefit plan: large uncertainty in the future, and the ease of underfunding.

Since someone starts accruing a pension with a company early in their career, there is naturally a long time between when their work begins and when they start to receive money from their pension.  Since these liabilities are so far into the future, the economic factors that govern how well the pension is funded are nearly impossible to predict.  Chances are in the 70’s when many of the current Detroit retirees started their work for the city, nobody expected the city to head for a dramatic economic decline and a sharply decreasing tax base.  Thus, the pensions offered at that time probably assumed that Detroit’s economy would be at least as strong as it was then, and that the city would grow and therefore generate more tax revenue than it did.  However, since both of these things fell far short of expectations, Detroit ended up with an underfunded pension system.  Furthermore, as Detroit’s revenue fell, other more essential city services have to be paid for before they can fund pension liabilities.  Since Detroit’s revenue has decreased so much, pensions naturally got pushed to the back of the line and thus were underfunded.

There are many different ways that governments and firms have used to solved their pension problems.  The first option is legislation; in Chicago, lawmakers are increasing the amount that current employees must pay into the pension system, and are reducing the cost-of-living increases.  Rhode Island performed something similar by changing their benefits and reducing cost-of-living expenses.  Verizon was able to shift the liability of covering their pension payments to Prudential Financial, stating that, “our business is not monitoring rates and managing pension funds.”  This seems like a smart idea, but chances are their pension systems are not nearly as toxic as the one’s faced by municipalities across the country.  Boeing shifted their pension dollars into 401(k) plans for their employees, making the transition from defined-benfit to defined-contribution.

Defined-benefit plans are inherently more risky that their counterparts.  Promising money that you don’t yet have (and in the many cases don’t end up having) is a dangerous financial practice.  Fortunately, many employers are shifting away from tradition pensions and into 401(k)s and IRAs.  From 1979 to 2011, the number of private sector workers on defined-benefit plans dropped form 39% to 14%, and the amount in defined contribution plans double to 42%.  I believe that this is a step in the right direction for fiscal security.  With life expectancy continuing to rise, firms would be wise to shift away from dangerous pensions and into IRAs, as many have done.  Hopefully we will never see a crisis like this in the future when we personally retire.

How fast is too fast for the Fed?

At the March FOMC meeting, Narayana Kocherlakota,the president of the Federal Reserve Bank of Minneapolis, dissented against the issued statement, objecting to the lack of numbers based guidance in regards to the taper.  According to WSJ, Mr. Kocherlakota, “believed the change in the Fed’s language weakened its commitment to push very weak levels of inflation back to the official target of 2%”.  Instead, he wanted to make 5.5% unemployment the new threshold for raising short-term interest rates.  Keeping interest rates low until unemployment reaches 5.5% could take some time, and is certainly a more stimulate monetary policy than that of the current Fed regime.  This so-called forward guidance would further drive down long term interest rates, and potentially stimulate the economy further.

While I may be slightly pessimistic about the recovery of the American economy, I’m not sure the Fed needs to have as loose of a monetary policy as Mr. Kocherlokota desires.  Despite that disagreement, I believe it would be wise for the Fed to make it’s trigger for raising interest rates less nebulous than in the most recent statement.  Even though I believe a 5.5% unemployment target might be too extreme, it certainly sends concrete and easy-to-interpret signals to the financial markets about the Fed’s future policy actions.

The vagueness of the Fed’s statement about keeping interest rates near zero “for a considerable  time” after the taper ends seems especially strange in light of recent G-20 summits that were “essentially all about clearer communication”.  I believe the Fed risks global instability when signals that could be interpreted in a variety of ways.

Others in the financial community have other worries about the policy of the Fed.  A recent International Monetary Fund  (the full report is here) report warns that if the U.S. grows faster than expected and begins raising interest rates too soon, the global economy would be weaken as a result of the increased borrowing costs for emerging nations.  The IMF warns that a slowing growth in emerging markets might cause investors to pull money out of those countries and result in a global shockwave, perhaps a worse version of what we saw earlier this year.  This is essentially a call for the Fed to be more cautious about the effect that their policy has on the world economy.  As I wrote about in a previous post, I don’t believe that the Fed should worry too much about the global economy when setting their own policy.  The Fed’s stated dual mandate is to help the U.S. economy achieve full employment and stable inflation levels, not to ensure global market stability.unemploymentcpi

The case of Mr. Kocherlakota and the opinion of the IMF provide both an internal and external criticism of the current Fed policy.  Both seem to be indicating that the Fed should wait longer than expected to raise interest rates and return the economy to normalcy.  As the graph to the right shows, employment has been steadily dropping over the past several years (although the unemployment situation is worse than the number implies), but inflation been much lower than the desired two percent target.  These two facts combined seem to support Mr. Kocherlakota’s argument that the Fed enacting a more stimulative monetary policy would be more in line with the stated goals of the Fed.  A more stimulative policy would keep interest rates near zero longer, coinciding with the IMF’s desire for lower rates.

However, there is certainly a downsize to the Fed making their policy more stimulative.  A change in it’s course could destabilize markets and increase uncertainty.  Perhaps the Fed doing a “good enough” job that everyone is currently positioned for would be better for the economy than the Fed strongly adjusting it’s expectations for a slightly expedited recovery.  Frankly, determine the benefits from either policy is difficult, and personally I would prefer stability in such a situation.

Sports and Monopolies

When you think of monopolies, certain large companies come to mind.  Standard Oil, the Bell Phone companies, and the Postal Service.  These firms service nearly every consumer in the marketplace, and their industries have very high entry costs.  The former two were broken up through antitrust litigation, while USPS remains today.  USPS is a government protected monopoly, meaning that they don’t fall under the U.S. antitrust legislation.  The government has decided that mail and electric monopolies (with federal oversight) are the best solution for essential services because they protect against the instability that come with the free market.  Oddly enough, there is another government protected monopoly: Major League Baseball.

The origins of this monopoly go back to the early 20th century.  In a 1922 ruling, the Supreme Court ruled that baseball was local, not interstate, commerce.  This ruling seems foreign in light of the current interpretation of interstate commerce laid down by more recent courts.  Thus it is surprising that the Supreme Court upheld baseball being outside of antitrust laws in both 1953 and 1972.  The position of the MLB has again been thrust into the spotlight as the city of San Jose is filing an antitrust lawsuit against MLB in its pursuit of the relocation of the Oakland A’s.  San Jose alleges, “the league and team owners have colluded to prevent the A’s from relocating because the league has made the San Jose market the exclusive territory of a competing franchise: the San Francisco Giants.”  The MLB believes that the funding for a new San Jose stadium isn’t fully materialized and the planned location isn’t adequate.

Regardless of the current lawsuit, the legal status of Major League Baseball brings out interesting questions about not only baseball leagues, but also the monopolistic type market control that the NBA and NFL have in their domains.  The NBA and NFL are big business, at $4.6 billion and over $9 billion  respectively, and they control the overwhelmingly large majority of market share in their respective sectors.  Although college football and basketball also generate a ton of revenue, the collegiate and professional leagues aren’t direct competitors, and in some ways they actually collude (for example setting minimum age requirements, thereby forcing players to stay in college).

The question that this brings to my mind is why doesn’t the government declare them a monopoly try to break them up?  Although each team can set ticket prices based on their market, there is no regulation from the government as far as ticket prices go.  Why are the major sports leagues such a phenomena?

I think it really boils down to two reasons:

  1. Americans really love sports.  On one hand, fans would appreciate if the government stepped in and tried to lower ticket prices for professional sporting contests.  This would actually serve to put money back into the pockets of the average person.  But I think most fans would hate it on principle.  The fact is that the major sports leagues have a much better reputation that the Federal government currently, and fans wouldn’t want the bad guys interfering with the good guys, even if it benefited them slightly.  Certainly professional sporting events are interstate commerce, and under current interpretation the feds could regulate sports more rigorously, but I don’t think that fans would appreciate it very much.
  2. There isn’t a viable way to create another league.  The current leagues like the NBA, NFL, MLB, and NHL have stable organizations with two to three dozen owners and massive facilities.  Nobody can just make modern stadiums out of thin air.  Even if they could, I doubt current professional players would jump ship to an alternative organization because they wouldn’t get paid as much.  If the best players weren’t in an alternative league, the quality of the product would be lower, and thus the existing league would win out anyway.

While I think it is strange that the MLB is afforded an official government monopoly and the other major leagues operate essentially the same way, I don’t have a major problem with it.  As they as they keep producing a good, entertaining product I will be a fan.  I think the current big leagues are here to stay.

Why are Michigan’s Roads so terrible?

The roads in Michigan are awful.  I grew up thinking that the thump-thump you hear when driving down the highway was normal, but as I’ve grown older, I’ve realized this isn’t true.  Sad as it is to say, I don’t mind when I cross the Ohio border and finally get some peace and quiet while driving.  The data about Michigan’s roads backs this up.  The American Society of Civil Engineers gave Michigan’s infrastructure a D in 2009, 2011 and 2013 (they gave the U.S. a D+ nationally).  According to the ASCE, about 30% of the bridges in Michigan are either “structurally deficient” or “functionally obsolete” and 38% of Michigan’s roads are in either poor or medicare condition.  More importantly, they believe that the poor conditions of the roads in Michigan costs the average motorist an additional $357 dollars per year in car repairs and traffic problems.

The fact is that all roads face some deterioration over time, and will need to be replaced eventually, but Michigan has two key factors that enlarge this problem.  The most obvious factor is the weather.  Driving around in the past few weeks has been an absolute nightmare in Michigan; potholes are everywhere as a result of an extremely cold and snowy winter.  When water seeps into cracks and later freezes, it expands and enlarges the cracks.  This is why the potholes have been especially prevalent and dangerous after this prolific winter season.  The second major factor that causes increased wear and tear on Michigan’s roads is a poor public transportation system.   The most often cited cause for a subpar public transit system in Michigan is the local interests of the major car manufacturers.  A company like Ford wants people to buy cars, but cars are less essential when there is good public transit.  Thus it follows that Ford might not support a public transit system.  The city of Detroit has only a small intra-city tram called the People Mover and the woefully deficient SMART bus system.  According to the Detroit Free Press, if SMART doesn’t receive an increase of funding this year, services could end as soon as the end of 2015.  After many years of planning, ground has finally been broken on a light-rail along Woodward in Detroit, with plans for completion in 2016, but the system fails to connect the suburbs with the city itself.

There is little opposition to the idea of increasing the funding to improve the conditions of Michigan’s roads.  Congressmen in both parties understand the importance and impact the road infrastructure has on the economy.  The real question lies in where the money to fund road improvements will come from. In 2013 Michigan governor Rick Snyder proposed a $1.2 billion increase in road funding, funded through either an increase in the gas tax and other fees, or an increase in the state income tax.  Although neither option is politically palatably, there are new proposals in state Congress to increase road funding by $450 million per year, well short of most estimates for what the state needs, through eliminating the flat gas tax and instead taxing it at 6%.  Thus, if prices rise higher than $3.55 per gallon, the tax will be more expensive than the previous 18 cent per gallon tax.  Proponents of this tax are eager to point out that a gas tax makes people who drive more pay more in taxes, which seems smart.

Another option that people frequently talk about is the use of toll roads to generate revenue.  Unfortunately, most of Michigan’s highways aren’t eligible to be used as toll roads.  Since the federal government funded a significant portion of the costs of state highways, those roads cannot be used as toll roads without repaying the government for their original investment.  Although there are some ways around these rules, trying to convert Michigan’s road into toll roads wouldn’t be financially viable.

I am glad that I current don’t own a car and don’t have to drive around the state very much right now, because the roads are horrible.  Personally, I hope that this new state funding will improve the overall quality of the roads in Michigan.  Since this issue is so universally supported, I hope lawmakers and effectively work together to find even more money to improve the state’s infrastructure and economic future.

New York’s Charter Battle

Political showdowns aren’t limited to Washington.  Recently, the Mayor of New York City, Bill de Blasio, and New York governor Andrew Cuomo, both Democrats, have been waging a war with one another about public schools in New York City.  Despite both supporting the improvement of city schools, they are at loggerheads about how to go about doing so.  Both support universal pre-K for all city students, but de Blasio wants to raise taxes, only on the rich, to do so.  More controversially, de Blasio has blocked some charter schools from utilizing unused space in public schools, but Cuomo vowed to champion them, even passing new legislation extremely beneficial to their cause..  These disagreements have even led to political rallies in Albany, on the same day!

Mayor de Blasio has problems with public charter schools being able to use public school buildings for free, in some cases while a traditional public school is operating in the same building at the same time.  The charter schools currently don’t pay to use the buildings, and save hundreds, or even thousands of dollars in cost because they don’t have to bear the costs of the buildings.  This objection seems somewhat reasonable to me, but isn’t completely convincing.  While charter schools ought to bear some of the cost of the buildings, it also doesn’t make sense for the space to simply go unused.  If charter schools can utilize the space for its intended purpose, I don’t have a specific issue with them doing so.

The two other reasons that de Blasio justifies his objection to charter schools seem a little more dubious to me. The reason for de Blasio’s rejection is that he dislikes the large amount of private support from large donors that some high-performing public charters receive, giving them resources beyond what traditional public schools can muster.  Second, he believes the co-habitation between charter schools and traditional school can cause division between both students and parents who attend the different schools.

Unfortunately, both of these reasons really point to the truth of the matter: Charter schools are performing better.  The numbers are striking, charter schools are outperforming traditional public schools on statewide assessments.  This improvement isn’t even localized to New York, but is true on a national level, where charters have begun to outperform other public schools.  According to a Stanford study, “the average charter-school student now absorbs five months of extra learning a year in math, and one extra month in reading, compared with counterparts in conventional schools”.  This is mostly a result of the ability of charter schools to hire and fire excellently or poorly performing teachers, while finding methods that work for the community.

In this light, de Blasio’s two arguments don’t hold much wait.  Yes, charter schools may be the beneficiaries of philanthropy, but they also receive less state money.  And furthermore It shouldn’t be a surprise to mayor de Blasio that people want to support schools that are doing well and changing lives instead of investing in a public school system that is failing.  de Blasio’s second argument is true, but not in the sense he thinks.  Yes, charter schools cause division, because everyone wants to be in one, but isn’t able to enroll.  Since charter schools generally only accept kindergartners en masse, if a parent doesn’t enroll their child early, they will never get into a charter school.

At the core, I believe that de Blasio really wants to help the school children of New York.  He recently said, “”The answer is not to find an escape route that some can follow and others can’t . . . the answer is to fix the entire system.”  But overhauling the entire public school system will be difficult.  Ridding the system of lousy teachers hiding behind union protection and fighting through the huge bureaucracy will be a long  and difficult process.  I agree that charter schools are really only a Band-Aid on the much bigger problem of bad public schools, but that doesn’t mean that they are a bad idea in the mean time.

(Revised) Fed Keeps Steady Policy Course

In the past months, the Federal Reserve has executed a steady tapering in their purchases of  long-term treasury bill and mortgage backed securities, although not without opponents.  As expected, the Fed voted in January to reduce the QE scheme from $75 billion to $65 billion in purchases, in the midst of slumping developing markets, and the exchange rates of many foreign currencies fell in response to changing expectations in the domestic market.  As U.S. investors saw potential for higher U.S. returns as government demand for T-bills decreased, they pulled funds out of foreign markets, causing net capital outflows and the weakened currencies in those markets.

By continuing with the intended tapering policy, the Fed made a decision not to consider the potential adverse effects of their decision on foreign markets.  In fact, “Fed officials made no mention of these trends in the statement released [in January].”  In recent years, this has been the general strategy of the Fed, with chairman Ben Bernanke stating in 2011, “It’s really up to emerging markets to find appropriate tools to balance their own growth.”  Foreign central banks took this policy to heart in January, with the Turkish central bank raising it’s overnight lending rate over 400 basis points , and other small central banks enacting similar policies.  While their policies weren’t very effective, these emerging markets clearly understand that the U.S. will not shape their policy to accommodate them.

At the March FOMC meeting, the Fed stuck to it’s stated plan, further tapering purchases from $65 billion to $55 billion in the coming months.  Perhaps the key feature of the March statement was the change in language about when the federal funds rate would start to rise.  No longer was the the federal funds rate to float between 0 and 25 basis points, “at least as long as the unemployment rate remains above 6-1/2 percent” as in the January press release. Instead, the March statement stated rates will remain low, “for a considerable time after the asset purchase program ends”.

 

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This key feature highlights the Feds respect and compliance with their dual mandate to both keep inflation and employment at their natural levels.  The March statement cuts the tie between unemployment and the federal funds rate.  As Chairwomen Yellen has mentioned recently, the labor market is still weak, and has much room to improve despite the increase in employment.  The graphic illustrates how unemployment has dropped, but along with it labor force participation as well.  These facts, coupled with the increase in workers only able to find part time employment skew the actual health of the economy, and thus why the Fed has stepped away from using unemployment as a measure for the economy as a whole.

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Although the Fed has seemingly deviated from past statements, the policy actions are consistent with their overall mandates.  The Fed initially chose a 6.5% unemployment number to try and avoid overheating the economy and driving inflation up.  However, this is no concern, because inflation has actually been far lower than desired in recent years, hovering between one and one and a half percent, despite the influx of money into the economy by way of the present quantitative easing.

I believe that the Fed has made the correct decision not to react to the fluctuations in the foreign markets or faulty economic data in their recent policy decisions. The Fed has recently show discipline not to venture from solid fundamentals and also to be willing to adjust expectations to what is best for the economy.  Although unheralded, the Fed has been key in propelling the economy towards recovery and stability, and has probably save tens or hundreds of thousands of jobs.