Lending on asset-backed securities

Early this morning, the Fed announced it would accept mortgage backed securities as collateral — Fed Statement on Expansion of Securities Lending:

The Federal Reserve announced today an expansion of its securities lending program. Under this new Term Securities Lending Facility (TSLF), the Federal Reserve will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS. The TSLF is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally. As is the case with the current securities lending program, securities will be made available through an auction process. Auctions will be held on a weekly basis, beginning on March 27, 2008. The Federal Reserve will consult with primary dealers on technical design features of the TSLF.

As the Wall Street Journal explains:

By providing an outlet for those MBS, the program is meant to make dealers more comfortable buying and holding such securities which are now being dumped by investors facing margin calls and others nervous about the strength of Fannie Mae and Freddie Mac, the huge, privately-owned government-sponsored mortgage agencies that guarantee most MBS. The same logic prompted the Fed to vastly expand the size and term to maturity of its daily money market lending operations on Friday as well as its “Term auction facility” by which it lends directly to banks against a range of collateral.

As I noted in an earlier posting, the list of collateral the Fed will take as part of the standard discount window programs includes other asset-backed securities (ABS). But apparently the new TSLF is more limited. It will be interesting to see whether the TSLF gets expanding to include more ABS — including intangible asset-backed securities.

Changing credit scores – and new set of intangibles

One of the grand intangibles in the lending business is the credit score. Two things go into any lending decisions: what is the likelihood of the loan being paid back and if the lender can pay back the loan, what do I get in return. Intangibles come into these decision in both areas. The latter is covered by collateral–and intangible goods, such as intellectual property and song/movie rights (even donor lists) are sometimes used for collateral. The part about assessing the risk of default has always been much more intangible. Part of making that intangible quantifiable was the use of credit scores. As the Wall Street Journal (Credit Scorers Find New Ways To Judge You) explains, “For many years, loan approvals were determined largely by borrowers’ credit scores, which are based on proprietary formulas that include such things as debt levels and loan-payment histories.”
But, as the story goes on to say, that is changing, “Now, lenders increasingly are looking at other factors, such as rent and utility payments, to determine whether potential borrowers will make good on their loans.”
Incorporating this new set of intangibles will open up the housing market to potentially some 50 million new borrowers. But as the sub-prime meltdown illustrates, that come with some risk. The credit scoring industry will need to convince lenders that the new system is fair and accurate. How they make that pitch and how it is received will say a lot about the current market’s tolerance for new financial ideas right now. It will have to be accepted on “safety & soundness” grounds based on more and better information–rather than as a means of expanding the market. If the change is successful, it may bode well for others to try to also expand increased lending on intangible assets on the other part of that decision: the use of intangibles as collateral.

January trade in intangibles – and revised 2007

After a good month in December, the US trade deficit turned slightly in January, as the BEA trade data showed an increase of $300 million— to $58.2 billion in January from December’s revised $57.9 billion. Both imports and exports increased, but imports great faster than exports: exports were up $2.4 billion and imports were up $2.7 billion. The dollar amount of oil imports continued to grow as both the price and volume increased. On a politically sensitive note, the deficit with China also continued to grow. The number was expected to be worse. According to the Wall Street Journal, “Economists surveyed by Dow Jones Newswires had estimated a $59.75 billion shortfall.”
Our intangible trade balance in January grew by $226 million to $11.2 billion. Every category—imports and exports, royalties and business services—grew. In both royalties and business services, exports increased more than imports. The royalties’ surplus grew by $56 million and the business services surplus by $168 million.
Note: our intangibles surplus covers approximately 45% of our consumer goods deficit.
The deficit in Advanced Technology Products increase in January to $3.5 billion, as imports declined dramatically and exports grew. The big change was a decline in aerospace exports. The last monthly surplus in Advanced Technology Products was in June 2002 and the last sustained series of monthly surpluses were in the first half of 2001.
The big news this month is the revisions for 2007, especially the second half of the year. BEA’s latest data on “other private services” (what I label “business services”) exports increased dramatically. In July, August and September, the data was revised upwards by $500 to $857 million. In October, November and December, the numbers were revised upward by over $1 billion. Likewise, imports were also revised upwards for those months—the biggest upward revision being a $720 million revision in December.
Royalty payments were also revised for the second half of the year, with royalty receipts (exports) revised upward by an average of $140 million per month and royalty payments (imports) revised downward by an average $13 million per month.
Consequently, our intangibles surplus for the second half of 2007 is on average $560 million per month greater than was previously reported. As a result of these revisions, I am updating the charts I published last month for annual growth in intangibles trade (see chart 2 below) and the percentage of intangible trade in our total international trade (see chart 3 below).
These revisions raise the obvious questions of the ability of our statistical system to cope with the I-Cubed Economy. For the months of November and December, this represents an increase in business services exports of over 7%. The BEA release states that the revisions are due to “the incorporation of more comprehensive and revised quarterly and monthly data.” BEA has made previous revisions to the business services data, as high as a change of $1.5 billion to December 2006 and March 2007 exports.
The Commerce Department recognizes the problem. Improving data on intangibles and services was one of the recommendations of the report of the Advisory Committee on Measuring Innovation in the 21st Century Economy (see also my earlier posting). BEA is undertaking a number of activities to improve the data on intangibles and the knowledge economy (see their strategic plan). In fact, last year, they instituted a new quarterly survey BE-125, Quarterly Survey of Transactions in Selected Services and Intangible Assets with Foreign Persons (see also the list of BEA survey’s on International Services Transactions). However, those surveys are quarterly—and the trade numbers are released monthly. So, for awhile, expect to see continued revisions in the intangible trade statistics.

Intangibles trade for Jan08
Intangibles trade – 2007 revised
Total trade in intangibles -2007 revised.gif


Note: we define trade in intangibles as the sum of “royalties and license fees” and “other private services”. The BEA/Census Bureau definitions of those categories are as follows:


Royalties and License Fees – Transactions with foreign residents involving intangible assets and proprietary rights, such as the use of patents, techniques, processes, formulas, designs, know-how, trademarks, copyrights, franchises, and manufacturing rights. The term “royalties” generally refers to payments for the utilization of copyrights or trademarks, and the term “license fees” generally refers to payments for the use of patents or industrial processes.


Other Private Services – Transactions with affiliated foreigners, for which no identification by type is available, and of transactions with unaffiliated foreigners. (The term “affiliated” refers to a direct investment relationship, which exists when a U.S. person has ownership or control, directly or indirectly, of 10 percent or more of a foreign business enterprise’s voting securities or the equivalent, or when a foreign person has a similar interest in a U.S. enterprise.) Transactions with unaffiliated foreigners consist of education services; financial services (includes commissions and other transactions fees associated with the purchase and sale of securities and noninterest income of banks, and excludes investment income); insurance services; telecommunications services (includes transmission services and value-added services); and business, professional, and technical services. Included in the last group are advertising services; computer and data processing services; database and other information services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; industrial engineering services; installation, maintenance, and repair of equipment; and other services, including medical services and film and tape rentals.

That part-time work problem

When the January employment numbers came out a month ago, I pointed out the rise in part-time work for economic reasons – otherwise known as involuntary underemployed. These are worker who would like to have a full time job, but can’t find one. Friday’s numbers for February were about the same — an increase of over 100,000 involuntary underemployed.
Part of the reason for this growth is economic conditions. But part is also due to a changing in the labor market itself – as the Wall Street Journal (More People Pushed Into Part-Time Work Force) points out:

A big factor is the fast-growing retail sector, which has felt more pressure to use part-timers since many supermarket and big-box chains started staying open for extended hours in the 1980s and 1990s. The stores’ most recent wrinkle is the adoption of computerized scheduling systems, which try to boost service and trim costs by matching staff size to customer traffic, hour by hour. Growth of part-time staff in the sector has been slightly outpacing that of full-time staff since 2000, according to Labor Department figures.
. . .
The makers of the new scheduling systems — as well as retail analysts and unions — say the systems make it easier for chains to manage a big roster of part-timers working short, flexible shifts. Previously, that was too difficult to be worthwhile for many companies. As use of the systems spreads, the makers are growing fast: Their combined revenue rose 8% last year to $814 million and could reach $1 billion in the next few years, according to AMR Research.

The problem isn’t just the reduced hours — many of these underemployed are actually working two or more part-time jobs. The problem is the lower hourly rate and the lack of benefits. And, as the Journal article notes, “Those working two part-time jobs are taxed twice for unemployment insurance.”
Part time work and flexible scheduling are going to be a permanent feature of the I-Cubed Economy. But there is no reason why part-time workers aren’t treated the same as other workers. At a minimum, we need a system that apportions job related benefits and taxes fairly accord multiple employers. Maybe I choose to work part time, but as long as we have an employer-provided health care system, that part-time job should contribute an equivalent part to my health insurance costs. Likewise, it should contribute something toward my retirement savings.
Fixing the part-time worker problem will increase the flexibility of the labor force – and a more flexible labor force will contribute to the agility of the I-Cubed Economy. That will contribute mightily to both the corporate bottom line and the nation’s prosperity.

What you read may be determined in Seattle

It’s a different type of economic clustering, but three very different companies located in the same area are determining what the public is reading. From the New York Times – Book Lovers Ask, What’s Seattle’s Secret?:

Though the big publishing houses are still ensconced in New York, the Seattle area is the home of Amazon, Starbucks and Costco, three companies that increasingly influence what America reads.
Books by relatively unknown or foreign authors become best sellers by dint of their anointment at the hands of Amazon editors. A forgotten older paperback, recommended and featured by the book buyer at Costco, can sell more copies in six weeks than it did in the last few years combined. Almost every book Starbucks stocks in its coffee shops sells more than 100,000 copies in its outlets alone. That pushes most Starbucks selections into the top 1 percent of all books sold that year, without counting sales in other types of stores.
The three companies settled in Seattle for different reasons, and each had its own motivation for choosing to sell books. Together, though, their combined power in the book industry has put the city in the position of tastemaker.

Strangely, there seems to be little of the standard synergies. Each company seems to be doing its own thing. And there doesn’t seem to be a lot of local spin-offs. Maybe it is just a coincidence — but it is an interesting one none the less.

Those job numbers

The February employment numbers came out this morning — and the decline in payrolls immediately had everyone crying recession (see for example Economics Blog : Economists React: Payrolls at ‘Recessionary Levels’).
The numbers certainly were not good. But I have a different immediate reaction: how little our data tells us about what is really happening in the labor market.
It speaks to the paucity of our language and conceptual framework. Right now, we look at the economy as split between manufacturing and services (with agriculture, mining and construction thrown in).
Our economic data is broken up by those industry categories. But the difference between the celebrity chef and the minimum wage fast food workers? Between the person who designs a bridge and the person who builds it? Composing a symphony and playing a symphony? Engineering a car and building a car?
According to our conceptual framework, one of those persons is in manufacturing, one in construction and six in services. To break it down further, two are in “food services”, two are in “performing arts” and two are likely categorized in “engineering services”.
None of those categorizations tell you anything about what the key difference might be. One difference is that the former in each pairing works more with their brains (intangibles) and the latter more with their muscles (tangibles). Sure, there is brain work in playing a symphony – but it is the tangible counterpart to the intangible composition process.
Each of the halves of those parings goes about their work in very different ways, uses different tools and relies on different skills. Yet our current economic data has no way of telling them apart.
Is it It is past time we updated our statistics and our concepts for the I-Cubed Economy.

Knowledge Ecology Studies

Late last year, a new online journal appeared – Knowledge Ecology Studies:

KE Studies is an online publication that focuses on the creation, dissemination and access to knowledge goods. It is a multidisciplinary journal that draws on a number of specialties: sciences, technologies, public policies, the laws of intellectual property, business, free speech and privacy, telecommunications and other related knowledge disciplines.

Issue #1 has an article Five Questions for James Boyle. In addition to the general questions about “knowledge ecology” there is this exchange:

We normally think of intellectual property rights as being synonymous with the right to exclude — to forbid publication or copying of books, to deny a license to an invention, to enjoin someone from using trademarks commercially. Yet there are other types of intellectual property rights; those that come with a right to payment, but not a right to exclude, such as compulsory licenses or so-called “liability rules.” Do you think these have a place in the future of intellectual property?
Absolutely. Liability rules are found throughout the intellectual property system. Whether it is someone making a “cover version” of a song on payment of the statutory fee or the “march in” provisions of the Bayh-Dole Technology Transfer Act, the idea is to separate the right to compensation from the right to forbid use. My colleague Jerome Reichman has spent much of his brilliant career writing about the ways in which these liability rules can minimize some of the dangers of legalized monopoly while still making sure to compensate innovators and distributors. The case for liability rules is particularly compelling in cases of humanitarian emergency — such as access to essential medicines — and in cases of technological monopoly that is accompanied by strong “network effects” — control over a dominant operating system, say. There is also a powerful case for it in the world of mashups and remixed art. Some have suggested that we should have an intermediate position between a finding of fair use for a parody or satire on the one hand, and the ability of a copyright holder to gain an injunction over derivative works on the other. With those alternatives, a “remixer” either has total freedom or none at all. Is there a place for an intermediate category, in which the copyright owner cannot forbid the use but is entitled to some share of the proceeds for any commercial exploitation? The difficulty in all of these cases, of course, is the issue of the appropriate level of compensation. How do we set that level without markets to guide us? How does one avoid the dangers of state corruption or capture? These concerns are real. Still I think that if one actually looks at the number of places in which liability rules already work, and work well, it is reasonable to conclude that they could be used more widely.

Interesting – and something I hope Boyle and others will pursue.