Although I’m generally a fan of credit unions, and I’m certainly a fan of bicycling, I’m not at all a fan of this new bike-loan product:

* Rates as low as 7.50% APR*
* 12-month term
* Borrow up to $2,500
* 100% financing of bike plus accessories

One of the best things about bikes is that they’re cheap. Yes, it’s easy to spend $2,500 on a bike if you put your mind to it — or much more even than that. But the only people buying $2,500 bikes should be people who can easily afford to pay cash for them: no one should be taking out a loan for that kind of luxury.

With any luck Eric Matthies will weigh in on this question on his blog — he knows much more about biking than I do. But my gut feeling is that the price-quality correlation when it comes to bicycles is pretty low, and that much of the time it’s actually negative. (What you gain in terms of lower weight — which is generally what you’re paying the big bucks for — you often more than lose on the functionality front.) If Portland credit unions want to encourage daily bicycling, I don’t think that a $2,500 racing bike is exactly what the doctor ordered.

I’ve spent the past day in San Diego (that’s why blogging’s been light) and my mode of transport while I was here was a rented Bianchi Cortina — a very nice bike which retails at $429. My feeling is that $400 is pretty much the maximum sensible price for a new bike for anybody who needs to borrow money to buy one. Maybe make it $500 with the accessories (helmet, lock, lights) included. But $2,500 is just silly.

Yes, Vikram Pandit is still a robot. Here’s his latest press release:

Vikram Pandit, Chief Executive Officer of Citigroup, today announced several senior management changes to support the company’s business and strategic priorities and to ensure that proper management is secured to lead these efforts.

“Our relentless focus on executing against our strategic priorities at Citi continues as we remain focused on rationalizing Citi Holdings, and on Citicorp as our core operating business,” Mr. Pandit said. “We are making consistent and substantial progress towards these goals. The senior management changes I am making today will further help in positioning our company for the future.”

Some of these changes make sense — Bill Rhodes, for instance, was always CEO of Citibank more in name than in fact. But others simply smack of yet more deckchair rearrangement, especially after the last reshuffle, in August, has already been re-reshuffled. It can’t be good that Citigroup is now on its fifth CFO in as many years. And it’s certainly not good that Pandit announces these major changes with a bunch of meaningless management jargon instead of any kind of vision.

Those first two paragraphs of the Citi press release are worth reading closely, since they reveal how utterly vapid the Citi business model really is. When all you can do is talk in a pro-forma way about “strategic priorities” and “positioning our company for the future”, it’s pretty clear that you don’t really have a clue what you’re doing, or why.

CEOs always resort to increasingly-frantic and increasingly-frequent management reshuffles before they themselves are ousted. And with the well-respected commercial banker Gene McQuade now running Citibank, I suspect the board will be mulling seriously whether they should elevate him to the top job. I give him a year to prove himself at Citibank, and then, if he succeeds, the poisoned chalice that is the job of Citigroup CEO is probably his if he wants it.

Anecdotally (which means that I don’t have any empirical data on this, but it feels this way), transportation spending is second only to defense spending when it comes to waste, inefficiency, and a general syndrome of money going to politically-influential districts rather than where it would make the most sense.

But then the Obama administration started banning earmarks in the stimulus bill and, I thought, leaving decisions on the allocation of funds to an independent central authority rather than to bickering legislators. I was rather surprised, then, to read this:

The stimulus law provided $26.6 billion for highways, bridges and other transportation projects, but left the decision on how to spend most of it to the states.

The results have been predictable: disproportionate amounts of money for roads in the middle of nowhere, while important urban transit projects go unfunded. Seattle, for instance, got none of the first tranche of federal stimulus funds; Charlotte got less than 2% of North Carolina’s.

This is why we need an Urbanist Party: so that city-dwellers can finally punch their weight in politics (Obama is the first president from a city in living memory) and so that local, state and federal government starts paying much more attention to the people who really make any modern economy run.

Joe Weisenthal asks, provocatively enough, whether I, had I been a banker during the credit boom, might not now be held criminally liable were the crime of bankslaughter on the books:

We wonder if Felix had been a banker whether he’d be guilty of bankslaughter. After all, in his research into the subject, he concluded early on that the issue of mortgage defaults wasn’t likely to be a huge deal. Later he changed his mind and of course, defaults proved to be a gigantic problem.

But if I were a prosecutor, I’d have no problem convincing a jury of 12 that a “reasonable” banker should’ve known that lending money to people of dubious credit risk, with low loan-to-value ratios, in an inflated market would’ve been a recipe for disaster.

Well yes — but that’s kinda the whole point. You don’t want the managers of systemically-important banks being as careless as I was on the subject of default risk. Here’s what I wrote in the piece that Weisenthal links to:

A little knowledge is a dangerous thing: I would have been much better off with a completely naive view than I was with a very basic grounding in mortgage finance.

I did some paddling around in the shallow end of the theory of mortgage bonds, and what I found surprised me: no one seemed to be the slightest bit interested in default rates. The prices of mortgage bonds were entirely a function of prepayment rates, and default rates simply didn’t enter into the equation.

Now I’m a finance blogger who prides himself on being wrong every so often (my slogan is that “if you’re never wrong you’re never interesting”) and who has essentially zero equity in being right. My job is to hold up my end of the conversation, not to be some kind of all-seeing market guru.

The manager of a systemically-important bank, on the other hand, is in a very different position, with vastly more responsibility. If such a manager did no more than do “some paddling around in the shallow end of the theory of mortgage bonds”, and on the basis of that took hundreds of billions of dollars of potentially highly-toxic assets onto his balance sheet, then yes, that’s highly reckless activity. And it’s probably reasonable to assume that if the crime of bankslaughter had been on the books at the time, then maybe such a manager might have thought twice before rushing in to such markets.

The key insight is that “financial innovation” is not the kind of thing you want too much of at too-big-to-fail institutions. Writes John Carney:

Collier doesn’t seem to have given much thought to the costs of over-deterrence. Bank executives faced with the prospect of a criminal investigation and possible conviction would likely be overly cautious. We’d lose a lot of socially beneficially risk taking by criminalizing bank failure.

For me, over-deterrence is a feature, not a bug. We’ve seen where Carney’s “socially beneficially risk taking” has landed us, and frankly I’d rather have rather a lot less of it.

Carney concludes:

Because bankslaughter is backward looking but conducting business is forward looking, it would almost certainly result in wrongful convictions. Lots of activity that looks reckless after the fact can seem perfectly sensible ahead of time. Unless the crime required bankers to know they were being reckless—in which case it would deter almost no-one and result in approximately zero convictions—it would wind up punishing bankers for just being wrong.

In an ideal world, of course, there would be no wrongful convictions simply because there would be no convictions and indeed no prosecutions. And Carney is right that it seems unfair to convict a banker of a crime just because he was heading up a too-big-to-fail institution and made a bad decision.

On the other hand, having the statute on the books would certainly increase incentives not to become too big to fail: it would help keep banks small. A capitalist society works by having private businesses take risks and fail. A capitalist society fails when private businesses are too big and systemically important to be allowed to fail. And so I think there is a case to be made that the managers of those businesses should be held to a significantly higher standard than managers elsewhere.

Mike at Rortybomb explains just how dangerous mortgages can be, even to people who avoid the toxic ones:

If I was a degenerate crackhead who snuck into your neighborhood and mugged you for $50, the Wall Street Journal Opinion Page would want me thrown in jail. Now imagine that I’m a degenerate crackhead who took out a subprime loan to move next door to you, in an arrangement that I’m likely not going to pay off. I might not even make one payment. If I default you’ll lose 10% of the value of your home from the externality effect. Assuming your home is worth $300,000, there’s a 20% chance I default in 2 years (realistic numbers), and you lose 10%; 300,000*.2*.1 = I’ve just robbed you for $6,000 while the Wall Street Journal Opinion Page cheered me on. And that’s one house – I’ll have a dozen neighbors. Now mind you, the product was great for me – I got to smoke crack indoors, in a house I could never realistically afford, which was a big plus. The subprime lender sold my loan to a pension fund in Denmark for a nice fee. It goes in the win column for us.

I’m reminded of Brad DeLong’s calculation of the amount that Edmund Andrews has gained by taking out a mortgage he couldn’t afford: if Andrews had behaved responsibly, says DeLong, he would have ended up in much the same place as he is now, but in the meantime he has spent about $97,000 extra over the course of five years. (Plus, of course, got himself a juicy book contract.) The subprime borrowers are often winners; it’s the rest of us who are the losers.

For reasons which are far too boring to go into, I just bought an expensive (four-figure) item for a friend, using my credit card. He paid me back in cash, which is now burning a hole in my PayPal account. And of course I have a human tendency to want to spend that money now, even though I know a monster credit-card bill is going to be arriving in a few weeks. So the question is: how do I maximize the utility of having use of those funds until the credit-card bill is due, while minimizing the temptation to just go out and spend all that cash?

Some good news is coming out of California:

Total U.S. wine sales rose about 5% in terms of volume in the first quarter from a year earlier, but wines priced at $25 a bottle and up fell about 12%, estimates Jon Fredrikson, an industry consultant with Gomberg, Frederikson & Associates in Woodside, Calif…

Price cuts are taking a heavy toll on wineries’ cash flows, and could make it difficult for them to raise prices in the future. “If you’re a $90 wine and all of a sudden you’re on the Internet at $50, how do you ever become a $90 wine again?” says Elliot Stern, chief operating officer of the Sorting Table, a Napa Valley-based wine distributor.

It’s long overdue that consumers of California wines — not least Californians themselves — became a bit price-conscious. The number of $90 California wines which are actually worth $90 on any kind of sensible global scale is minuscule: most $90 California wines were priced that high simply to stroke the winemaker’s ego and keep up with the winery next door. There’s also the fact that much California wine-growing land is astronomically expensive, or was; prices coming down on that front will also be a good thing.

What we’re seeing is some kind of two-way market finally asserting itself: volumes increasing, as Economics 101 suggests they should, as prices decline. Let’s hope this continues for a while.

Justin Fox wants contingent stimulus legislation which kicks in if the unemployment rate passes 11%

Which did better over the past 15 years: Cash or Stocks?

Matt Taibbi: “When people respond by calling names and changing the subject, it means they don’t have any issue with the factual allegations in the article.”

Does the Pope read my blog?

Google answers the question: How will you get used to using Gmail without that familiar grey “BETA” text?

The legal reasoning why CDS are not insurance contracts

Jen Chung with a great roundup of the latest developments in the fiasco that is the WTC site

“Ten years ago, 55% of The Atlantic’s revenues derived from print advertising. Today, that figure is 29%.”

Another Citi management reshuffle?!

The annotated TARP application

Philip Delves Broughton notes that Robert McNamara, one of Harvard Business School’s most notorious graduates, basically did in the field of war what Wall Street quants did in the field of finance:

The journalist David Halberstam wrote that McNamara mistrusted people who did not speak his language of statistics and hard data. If it ever came down to one person saying something “just didn’t feel right” or that it “smelled wrong”, he would always go with his facts over their feeling. Fatally, in the case of Vietnam, the data he received was not accurate.

When Wall Street quants fail to account for model risk, they can end up losing hundreds of billions of dollars. But that’s an improvement over what happened when McNamara failed to account for model risk: those losses were much worse.

Robert Teitelman thinks that since he’s in charge of a publication aimed at financial-market professionals, there’s no need to spend much effort on making it easy to read:

There’s an entire world of B2Bs like The Deal and Dealscape that, in fact, are targeted at practitioners. The difficulty of the B2B game is not necessarily to write more accessibly as it is to report and write with greater sophistication and depth.

There are two problems here, as I see it. Firstly, there’s no reason that accessible journalism can’t be sophisticated and deep. It’s not necessarily easy to write accessibly about complex and sophisticated ideas, but yes, it can be done. The main problem is that it takes much more time and effort: the amount of work I put into my Wired story on the Gaussian copula function, for instance, was a good order of magnitude greater than the work that I would put into writing at that length on the blog. Maybe straitened journalistic enterprises don’t have the resources to make their stuff accessible.

But secondly I think that financial journalists are deluded if they think financial-market professionals are willing and able to wade through pages and pages of dry, jargon-heavy prose. The financial professionals I know tend to have short attention spans and have no particular eagerness to read the trades — especially any story in which they’re not quoted. Just because you’re writing for a business audience doesn’t mean your writing shouldn’t be lively and accessible. And, ideally, short.

Teitelman adds, apropos my call for more accessible financial blogging,

Salmon and his commenter skip past the hard question here, however: Can the complexity of finance (and economics) be effectively captured by the kind of simple explanations required by an audience that barely knows the basics? Let’s put it another way: In telling that “simple” story, is the journalist distorting the situation, highlighting certain aspects, accentuating certain tendencies and ignoring others?

It’s true that the mass audience does tend to be attracted by simple explanations; I got a worryingly large number of emails after my Wired piece came out essentially saying “thanks, you’ve now explained everything”. Which of course one article about one formula could never do. But I never asked for journalists to oversimplify, and there’s no reason that accessible journalism can’t show many sides to any given story. What’s more, trade journalism is also guilty of many of the sins which Teitelman enumerates.

It’s not just journalists, of course, who will highlight certain things and ignore others. Often, the journalists do that just because they rely, of necessity, on their industry sources — and their sources are doing it too. One of the problems with trade journalism is that a lot of day-to-day reporting is done via the banks’ PR departments, and the PR departments tend only to serve up managing directors and above for interviews. And when you talk to high-level people, you’re often talking to people who are genuinely ignorant. Think of AIG Financial Products, as described by Michael Lewis:

It’s hard to know what Joe Cassano thought and when he thought it, but the traders inside A.I.G. F.P. are certain that neither Cassano nor the four or five people overseen directly by him, who worked in the unit that made the trades, realized how completely these piles of consumer loans had become, almost exclusively, composed of subprime mortgages.

Or think about Bob Rubin, who famously told Carol Loomis that he’d never heard of the notorious liquidity puts which ended up all but destroying Citigroup until after it was far too late — despite the fact that Rubin, more than any other individual, was meant to be the person taking the big-picture view of the bank’s overall risk profile.

Looking back at the history of journalism over the course of the financial crisis, the problem was never too much oversimplification as it was too many journalists taking a narrow view of the market: they didn’t think nearly enough about — or push bankers to answer tough questions about — big-picture systemic risks. It’s a hugely important role of journalism to put events in large-scale perspective. Those stories should be written more often, and they should be written as accessibly as possible, by journalists and bloggers both.