Jack Tapper of ABC list all of the goodies promised by Obama in just one stump speech. The list is really staggering, even more so than the usual political BS. It is way to long to excerpt here. There are so many outrageous ones, its hard for me to even pick a favorite. But here are a few good ones:
"eliminate the oil we import from the Middle East in 10 years"
Uh, right. We are going to completely eliminate half the fuel coming into the economy in 10 years.
"lower premiums" for those who already have health insurance;... "end discrimination by insurance companies to the sick and those who need care the most";
Perfect. We are going to prevent insurance companies from dong any risk management, we are going to pile on even more "must cover" rules for all kinds of crap from acupuncture to mental health, and by doing so we are going to lower premiums.
This may be my favorite, though:
"reopen old factories, old plants, to build solar panels, and wind turbines"
LOL. Barrack is going to open some of those old GM plants in Flint, Michigan and build solar panels. Seriously, is this a rhetorical flourish or does he really believe that factories are generic production facilities that can make anything, kind of like those little buildings you make in an RTS?
Update: And if you think that voters just discount all this stuff, don't miss this video of Obama supporters talking about the free gas and house she is going to get.
By the way, none of this will push me to vote for McCain. McCain promises all kinds of crazy stuff too, its just less compelling stuff to voters. He is not losing because he is promising less -- I think he is losing because Obama has a better grasp of what expensive shit people want to be promised than does McCain.
There is a quote from Robert Redford in Three Days of the Condor** that honestly reflects my opinion on the topic of leaving the US (Redford is Joe Turner, running away from the CIA, while Joubert is an assassin-for-hire):
Turner: I'd like to go back to New York.
Joubert: You have not much future there. It will happen this
way. You may be walking. Maybe the first sunny day of the spring. And a
car will slow beside you, and a door will open, and someone you know,
maybe even trust, will get out of the car. And he will smile, a
becoming smile. But he will leave open the door of the car and offer to
give you a lift.
Turner: You seem to understand it all so well. What would you suggest?
Joubert: Personally, I prefer Europe.
Joubert: Yes. Well, the fact is, what I do is not a bad occupation. Someone is always willing to pay.
Turner: I would find it… tiring.
Joubert: Oh, no — it's quite restful. It's… almost peaceful.
No need to believe in either side, or any side. There is no cause.
There's only yourself. The belief is in your own precision.
Turner: I was born in the United States, Joubert. I miss it when I'm away too long.
Joubert: A pity.
Turner: I don't think so.
A great line, particularly in a movie steeped in cold war weariness. Anyway, I was listening to some rant on NPR about leaving the US if McCain won the election, and I asked myself if I had to leave the US, what would be my rank order of countries to which I might move. My list is highly influenced by language (at 46 I hardly feel like learning a new language) and by countries of which I am knowledgeable. Here is what I came up with:
Germany / Austria
Here are some notes on the list, as well as some explanations of countries left off:
I have yet to meet an American who did not enjoy living in Australia (and many long to go back). I came within about 5 minutes of living in Bermuda about seven years ago. I have always liked the UK and have spent many summers there.
Ireland might belong high on the list, but I have never been there and am not that familiar with it. But my sense is that if I really were to research it, Ireland would make the top 5. I could also probably have rattled off a number of other British island colonies, but kept it to Bermuda.
Canada ... its like a whole other state (this is a line I uttered at business school once, echoing the then-current "Texas ... its like a whole other country" advertising campaign. It was not well-recieved by our northern neighbors. I still think a few Canadians are trying to hunt me down up there
Been to Singapore a few times. An odd place, but certainly a liveable one. Last gasp of the English speaking choices on the list.
Netherlands and Switzerland are both fairly capitalist-friendly nations with good support for a displaced English speaker. I have spent more time with the Dutch, so it is a bit higher, but Switzerland is freaking gorgeous.
Spain is on the list mostly as a language play. Not a huge fan of the Spanish government, but I speak the language well enough to pick it up quickly. Good beaches, and the south coast has many of the appeals of Provence without the prices (and the French). A couple of years ago this probably would have been Argentina. I really loved Argentina when I was there, but I am scared a bit by the current political and economic climate.
I like Austria, and Germany is OK. Not America but perfectly reasonable places to live.
If I am really running not just form the US but the first world in general, I might pick Costa Rica. A pretty good government, particularly for Latin America, beautiful, and plenty of places to be secluded (and/or hide, if the need were to arise).
I considered the Czech Republic. Prague seems to be the white-hot destination for American tourists, and they certainly know their beer. But I suspect that Eastern Europe has several more decades of work before the every day conveniences and creature comforts to which I have become accustomed in the US are prolific there.
Scandinavia is too freaking cold. Maybe if I were single I might find some appealing reasons to reconsider...
There may be some country like Monaco that would suit me perfectly but of which I am wholly unfamiliar.
Readers are welcome to propose their own priorities in the comments.
** Postscript: Three Days of the Condor is one of my favorites, for a couple of reasons. First, I always loved Faye Dunaway. Second, and more important, I like thrillers that have a more languid pace. I know that sounds weird to say, and if I were a film critic I might have the right words, but there is something about the music and the editing and the pacing that almost stands in contrast to the urgencies of the plot itself. Despite being on the run through the movie, Redford never actually runs. No car chases either. Sort of the antonym to the shaky rapid-cut camera action of, say, the Bourne movies. Other movies I would put in this same category are LA Confidential (maybe my favorite movie) and perhaps the newer version of the Thomas Crowne Affair. I might put Chinatown on this list too, but then since 3 of the 4 would include Dunaway, one might think my first rather than my second criteria was driving the list.
By the way, even action movies could learn something from this. The first Indiana Jones movie was great in part because the action scenes were interspersed with quiet scenes. The audience gets to rest from time to time, and the action is highlighted by the contrast. You can even have some token character development. Later Indiana Jones movies fell into the trap of going for non-stop adrenalin.
Before the Valley's light-rail service ever begins, the cost to ride the train and city buses may be headed up.
The issue of raising the Valley's regional fare policy has been
brewing for several months as transit officials have struggled to cover
rising gas prices
and other increased operation costs, said Greg Jordan, Tempe's transit
administrator. Transit and light-rail costs are covered by a half-cent
sales tax, which has fallen over the past year.
The real issue is that transit agencies are generally given a fixed pot of money for operating subsidies (in this case the proceeds of a half-cent sales tax) and rail tends to take a hugely disproportionate share of that money, starving out less sexy but more practical and cost-effective bus systems. Even in the that wet dream of rail planners, Portland:
In fact, 9.8 percent of Portland-area commuters took transit
to work before the region build light rail. Today it is just 7.6
percent. In a story repeated in numerous cities that have built rail
lines, rail cost overruns forced the city to raise bus fares and reduce
bus service. That’s a success?
Rail makes zero sense in a city like Phoenix. All this will do is
create a financial black hole into which we shift all of our bus money,
so the city will inevitably end up with a worse transportation system,
not a better one. Cities that build light rail almost always
experience a reduction in total transit use (even the great God of
planners Portland) for just this reason - budgets are limited, so since
rail costs so much more per passenger, other transit is cut back. But
the pictures of the train will look pretty in the visitor's guide.
Daniel, an American reader who does quite a bit of work in Europe, wrote me:
1) The static nature of the Euro mentality assigns a high cost to ... people ... who try to break the mold. Cost of failure is relatively high. In Italy if your small business declares bankruptcy, you forfeit the right to vote.
2) In Germany, workers are sorted at an early age into "blue collar schools" and "professional schools". I know from my youth, if I had grown up in Germany instead of America, I probably would not be a consultant but more like a janitor (not that there is anything wrong with janitors...).
3) Social services in Europe are hit and miss. In Germany, many people carry private insurance despite the availability of public insurance because of the lack of quality.
4) (this may be a good thing) Italian school children go through a less harsh puberty than American kids. Society has drilled into them that it's not cool to be different, so there are less cliques. When I share my experiences in school with most Europeans they usually make some snide remark about how growing up in a battle zone (primary school) has caused the Iraq war.
5) Highly skilled workers are in many cases no better paid than unskilled staff. In the south of Italy a senior programmer may make 2K euros per month. A secretary might make 1.5K a month. If it weren't for most Europeans fear of moving to new cities, there would be no programmers to hire.
6) Speaking of being afraid to move, many Europeans find the thought of moving to a different city complete alien concept.
7) Life in Euro is a much more comfortable than in America *if* you are European. If you are an immigrant, forget it. After two years of pitching companies in the South of Italy, I have never seen a black person be more than a street side vendor of trinkets. In Italy, there is an unsaid rule that you must be an Italian to ever be a professional.
8) Don't get me started on France.
9) It is illegal for a business to stay open more than it's quota in most European countries. It is illegal to operate a barber shop on Mondays.
Recent circulation numbers showing continued, substantial declines of traditional newspapers give me an excuse to make a point I have wanted to make for some time.
I am a frequent critic of newspapers. I think they have lost focus on the hard-hitting investigative journalism which used to be their highest and best calling, instead considering reiteration of an activist's press release sufficient to check the journalism box on some particular issue. When investigative reporting does occur, it almost always is focused to support the dominant or politically correct outcome, rather than to really challenge conventional wisdom. Media coverage of any technical issue involving science or statistics or economics is often awful, in large part because journalism is too often the default educational path of folks who want to avoid numbers. Any time I have been on the inside of some issue receiving coverage, I have generally been astounded by how little the print descriptions matched reality. Now that I am interviewed more as a source for articles, I never think my views are well-quoted (though that may be my fault for not talking in sound bites). And, like many, I get irritated that the media's arrogance and self-referential reporting seems to increase in direct proportion to their drop in circulation.
All that being said, the world without healthy newspapers is a bad thing.
First, we bloggers can blather on all day about being the new media, but with the exception of a few folks like Radley Balko, we're all editorial writers, not reporters (I consider my role at Climate-Skeptic.com to be more like journalism, but only because there is such a glaring hole on that topic in traditional media). I couldn't do what I do here, at least on this particular blog, without the New York Times and the Washington Post. I'm a remora feeding on their scraps. I can't bring down the big fish by myself, I can only feed on the bits they miss.
Second, and perhaps more important in this world of proposed reinstatement of the Fairness Doctrine, print media is the mode of speech best protected by the First Ammendment. This isn't the way it should be -- all speech should be equal -- but in reality goofy regulatory regimes for radio, TV, and even the Internet all offer the government leverage points for speech control they don't have with the print media. It's why half the dystopic sci fi novels out there have a world dominated by TV -- because that is where government has the most control of speech.
So here's hoping you guys at the NY Times get your act together.
European-Style Political Economy Coming to America
A lot of folks, particularly on the left, look with some fondness at the political economy of continental Europe. They are attracted by high job security, short work weeks, long vacations, and a strong welfare system. They make the mistake of seeing in these traits a more promising society "for the little guy," when in fact just the opposite is true.
The European Corporate State
The political economy of companies like Germany and France are actually incredibly elitist, dominated by perhaps a hundred guys (and I do mean guys) who run the country in a model only a few steps removed from Mussolini-style fascism or the Roosevelt's National Industrial Recovery Act. In these countries, perhaps 20 corporations, ten or fifteen large unions, and a group of powerful politicians and regulators run the economy.
US workers sometimes make the mistake of seeing the political power of European unions and equating this power with being a more egalitarian environment for workers. But the European political economy is rule by the in-crowd over the out-crowd that exceeds any of the patronage relationships we complain about in this country. What we don't often see from our American perspective is the way the system is structured not to protect poor from the rich or the weak from the strong, but to protect incumbents (whether they be corporations or skilled workers) from competition.
In the European labor markets, mobility is almost impossible. The union system is built to protect current high-skilled workers from competition from new workers, whether in the same country of from abroad. Large corporations that form part of the cozy governance of the country are protected from new competition, and are bailed out by the government when they hit the rocks.
As a result, unemployment is structurally high in countries like France and Germany, hovering for decades between 8 and 12% -- levels we would freak out at here. Young and/or unskilled workers have a nearly impossible time breaking into the labor market, with entry to better jobs gated through apprenticeships and certifications that are kept intentionally scarce. Joe the plumber is an impossibility in Europe. Some Americans seem to secretly love the prospect of not easily being fired from their job, but they always ignore the flip side -- it is equally hard to ever be promoted, because that incompetent guy above you can't be fired either.
Entrepreneurship in Europe is almost impossible -- the barriers just to organizing your own corporation legally are enormous. And, once organized, you will quickly find that you need a myriad of certifications and permissions to operate in your chosen field -- permissions like as not that are gated and controlled by the very people you wish to compete with. The entire political economy is arrayed in a patronage system to protect current businesses with their current workers.
Here is a test, that works most places in the US except possibly in Manhattan. Ask yourself who are the wealthiest and/or most succesful people that you know. Then think about where they went to school. Sure, some of the more famous Fortune 25 CEOs went to name schools, but what about the majority of succesful people you meet in your life? If you are like me, most of them did not go to Ivy League or what one might call elite schools. They had normal state college educations. You will typically find a very different picture in Europe. While of course there are exceptions, it is much more likely that the wealthy people one meets were channeled through a defined set of elite schools.
Corporations in Europe, particularly the cozy few who wield influence with the government, seldom fail and/or really gain or lose much market share. I always thought this a telling statistic: (Fortune 100 by year here)
[Olaf Gersemann] points out that of the top 20 largest publicly traded companies in
the US in 1967, only 11 are even in the top 60 today, much less the top
20. In contrast, he points out that of the 20 largest German companies
in 1967, today, thirty-five years and nearly two generations later, 19
are still in the top 60 and 15 are still in the top 20.
Its also an inherently anti-consumer society. The restrictions on foreign trade, entrepreneurship, and new competition all reduce consumer choice and substantially increase prices. EU anti-trust enforcement, for example, barely pretends any more to look out for consumer interests. Most of the regulators decisions are better explained by protection of entrenched and politically influential European competitors than it is by consumer power or choice.
"Progressives" in this country often laud the lower income inequality numbers in Europe vs. the United States. The implication is that the poor in Europe are somehow better off. But in fact this is not true. Careful studies have shown that the poor are at least as well off in the US as in Europe, particularly when one corrects for the number of new immigrants in the US. (That's another difference, by the way -- Europe is virtually closed to immigration, at least as far seeking new integrated citizens is concerned). What drives income inequality is that our middle class is richer than Europe's middle class, and our wealthy have more income than Europe's wealthy.
To this last point, I have always felt that comparisons of the wealthy in the US to those in Europe, and comparison of income inequality numbers, are a bit apples and oranges. The US is a country where access to most of the best perks is via money - they have a price. In Europe, access to most of the best perks can't be bought by money, they can only be accessed by those with the elite establishment club card. To some extent, the income numbers understate the difference between rich and poor in Europe for this reason.
Next Stop: America
We see many of the elements of the European economic system slipping into the US today. An increasing number of professions require certification by the government, with this certification often either controlled by the incumbents in the profession or with criteria that essentially require new entrants to compete in the same way incumbents do. We see the top companies with political influence, from Wall Street firms to banks to automobile manufacturers getting government assistance to stay in business or maintain their status. This, from the proposed GM bailout, is the European system personified:
General Motors and Cerberus Capital Management have asked the U.S. government for roughly $10 billion in an unprecedented rescue package to support a merger between GM and Chrysler, two sources with direct knowledge of the talks said on Monday....
one of the conditions of the merger would be that GM-Chrysler would
spare as many jobs as possible in order to win broad political support
for the government funding needed to complete the deal, people familiar
with the merger discussions said.
This is the same political deal cut in Europe. Large powerful company is protected from failure by government. In turn, powerful company protects interest of powerful union. The only thing missing here, which I think is clearly on the agenda for the Obama administration, is a large protective tariff to shield this inefficient mess from competition. Left out of the equation are consumers, who get more expensive cars and suffer because GM is again given a hall pass from producing cars that people actually want to buy. Also left out are potential competitors, who don't get the government deal and who miss out on the chance to buy up GM assets and hire ex-GM employees out of bankruptcy and do a better job with them. This European system puts a premium on keeping productive assets in their current hands, rather than in the most productive hands:
Corporate DNA acts as a value multiplier. The best corporate DNA
has a multiplier greater than one, meaning that it increases the value
of the people and physical assets in the corporation. When I was at a
company called Emerson Electric (an industrial conglomerate, not the
consumer electronics guys) they were famous in the business world for
having a corporate DNA that added value to certain types of industrial
companies through cost reduction and intelligent investment. Emerson's
management, though, was always aware of the limits of their DNA, and
paid careful attention to where their DNA would have a multiplier
effect and where it would not. Every company that has ever grown
rapidly has had a DNA that provided a multiplier greater than one...
for a while.
But things change. Sometimes that change is slow, like a creeping
climate change, or sometimes it is rapid, like the dinosaur-killing
comet. DNA that was robust no longer matches what the market needs, or
some other entity with better DNA comes along and out-competes you.
When this happens, when a corporation becomes senescent, when its DNA
is out of date, then its multiplier slips below one. The corporation
is killing the value of its assets. Smart people are made stupid by a
bad organization and systems and culture. In the case of GM, hordes of
brilliant engineers teamed with highly-skilled production workers and
modern robotic manufacturing plants are turning out cars no one wants,
at prices no one wants to pay.
Changing your DNA is tough. It is sometimes possible, with the
right managers and a crisis mentality, to evolve DNA over a period of
20-30 years. One could argue that GE did this, avoiding becoming an
old-industry dinosaur. GM has had a 30 year window (dating from the
mid-seventies oil price rise and influx of imported cars) to make a
change, and it has not been enough. GM's DNA was programmed to make
big, ugly (IMO) cars, and that is what it has continued to do. If its
leaders were not able or willing to change its DNA over the last 30
years, no one, no matter how brilliant, is going to do it in the next
So what if GM dies? Letting the GM's of the world die is one of the
best possible things we can do for our economy and the wealth of our
nation. Assuming GM's DNA has a less than one multiplier, then
releasing GM's assets from GM's control actually increases value.
Talented engineers, after some admittedly painful personal dislocation,
find jobs designing things people want and value. Their output has
more value, which in the long run helps everyone, including themselves.
The alternative to not letting GM die is, well, Europe (and Japan).
A LOT of Europe's productive assets are locked up in a few very large
corporations with close ties to the state which are not allowed to
fail, which are subsidized, protected from competition, etc. In
conjunction with European laws that limit labor mobility, protecting
corporate dinosaurs has locked all of Europe's most productive human
and physical assets into organizations with DNA multipliers less than
Beyond the actual legislation, the other sign that the European model may be coming to the US is in attitudes. I think Michelle Obama is a great example of this. She and her husband checked all the elite boxes - Princeton undergrad, Harvard Law - but she is shocked that having punched her ticket into elite society, society didn't automatically deliver, as it might in, say, France. She's actually stunned that, had it not been for Barrack's succesful books, they might have had to give up their jobs as community organizers and at non-profits to actually earn enough to pay back their 6-figure school loans.
Despite their Ivy League pedigrees and good salaries, Michelle Obama
often says the fact that she and her husband are out of debt is due to
sheer luck, because they could not have predicted that his two books
would become bestsellers. "It was like, 'Let's put all our money on
red!' " she told a crowd at Ohio State University on Friday. "It wasn't
a financial plan! We were lucky! And it shouldn't have been based on
luck, because we worked hard."**
The Progressive Irony
In all this, I think there is an amazing irony. In a nutshell its this: The "Change" that Barrack Obama is selling to the electorate is in fact the creation of a government infrastructure to fight change. I have written before that progressives are actually inherently conservative.
Ironically, though progressives want to posture as being
"dynamic", the fact is that capitalism is in fact too dynamic for
them. Industries rise and fall, jobs are won and lost, recessions give
way to booms. Progressives want comfort and certainty. They want to
lock things down the way they are. They want to know that such and such
job will be there tomorrow and next decade, and will always pay at
least X amount. That is why, in the end, progressives are all
statists, because, to paraphrase Hayek, only a government with
totalitarian powers can bring the order and certainty and control of
individual decision-making that they crave....
One morning, a rice farmer in southeast Asia might faces a choice.
He can continue a life of brutal, back-breaking labor from dawn to dusk
for what is essentially subsistence earnings. He can continue to see a
large number of his children die young from malnutrition and disease.
He can continue a lifestyle so static, so devoid of opportunity for
advancement, that it is nearly identical to the life led by his
ancestors in the same spot a thousand years ago.
Or, he can go to the local Nike factory, work long hours (but
certainly no longer than he worked in the field) for low pay (but
certainly more than he was making subsistence farming) and take a shot
at changing his life. And you know what, many men (and women) in his
position choose the Nike factory. And progressives hate this. They
distrust this choice. They distrust the change. And, at its heart,
that is what the opposition to globalization is all about - a deep
seated conservatism that distrusts the decision-making of individuals
and fears change, change that ironically might finally pull people out
of untold generations of utter poverty.
Don't believe me? Below is from an email I received. The writer was outraged that I would have the temerity to say that the middle class in the US had it better than even the very rich in the 19th century.
Sure, the average rural resident of a developing country earns more in
dollars today than before. But you're missing the big picture. Wealth
is about so much more than just money, and status symbols. It is about
health, and well being, and contentedness, and happiness. The average
peasant family in India in 1900 may have
lived a spartan lifestyle by today's standards, but it probably could
rely on more land per family, crops uncontaminated by modern pesticides
and fertilizers, a stronger social network and village-based safety
net. These peasants were self-sufficient. That is no longer the case
Progressives want to eliminate risk and lock in the current world. New technologies, new competitors, new business models all need to be carefully screened and gated by a government-labor-corporate elite. Entrepreneurship, risk, mobility, achievement all should be sacrificed to a defined and steady paycheck. In the name of dynamism, progressives, as well as many modern politicians, want to limit the dynamism of the American economy. In the name of egalitarianism, they wish to create a small political elite with immense power to manage everyone's life. In the name of progress, they wish to lock current patterns and incumbents in place.
I don't know why I can't just move along from Michelle Obama's rant about the terrible cost of her Princeton / Harvard Law degree.
Maybe its because I attended the same schools (different degrees) and
my reaction is just so different -- I had a fabulous experience and
live in awe that I had such a unique chance to attend these schools,
while Michelle Obama seems to experience nothing but misery and
resentment. Granted that I did not have to take on a ton of debt to
get these degrees, but I have plenty of friends (and a wife) that did.
This analogy comes to mind: Let's say Fred needs to buy a piece of
earth-moving equipment. He has the choice of the $20,000 front-end
loader that is more than sufficient to most every day tasks, or the
$200,000 behemoth, which might be useful if one were opening a strip
mine or building a new Panama Canal but is an overkill for many
applications. Fred may lust after the huge monster earth mover, but if
he is going to buy it, he better damn well have a big, profitable
application for it or he is going to go bankrupt trying to buy it.
So Michelle Obama has a choice of the $20,000 state school undergrad
and law degree, which is perfectly serviceable for most applications,
or the Princeton/Harvard $200,000 combo, which I can attest will, in
the right applications, move a hell of a lot of dirt. She chooses the
$200,000 tool, and then later asks for sympathy because all she ever
did with it was some backyard gardening and she wonders why she has
trouble paying all her debt. Duh. I think the problem here is
perfectly obvious to most of us, but instead Obama seeks to blame her
problem on some structural flaw in the economy, rather than a poor
choice on her part in matching the tool to the job. In fact, today,
she spends a lot of her time going to others who have bought similar
$200,000 educations and urging them not to use those tools productively, just like she did not.
I got another one of those scam letters from a company that attempts to trick businesses into thinking their bill is actually a requirement of a state regulatory organization (original post here). This one is from the "Indiana Corporate Compliance Business Division." It looks like one of the millions of small fees a business actually does have to pay to state governments for all kinds of random stuff, but is actually a business solicitation. I will give this one credit - the font size at the bottom where they say this is a business solicitation and not a bill from a government agency is actually a size larger than similar language on the last one I received. (click to enlarge image below)
I did not take them up on their offer, so I do not know what one would get back, if anything, from them. It is indeed important to keep minutes books up to date. But I do know that the information they request in addition to the fee is not nearly enough to create a meaningful set of minutes for one's corporation, so my guess is it is a ripoff.
So If It's All About the TED Spread, Should We Be Worried?
Us non-financial types are always learning something new. After a lifetime of thinking that our economy rests on free markets, entrepreneurship, an educated and flexible labor force, risk-taking, etc., we suddenly find that everything depends on the TED Spread, a metric most of which most of us were blissfully ignorant 2 months ago.
The TED spread is basically the difference or spread between short term inter-bank loan rates and short term treasuries or T-bills. It is in some sense a measure of perceived risk of lending to banks vs. (what are considered) low or near-zero risk US treasury obligations. One way to think about it in the current market is how much extra would you need in interest to lend to your slacker brother-in-law Earl vs. say to Bill Gates.
Now, the period from 1970-1983 were not by any means an economic glory period, but on the other hand its clear that TED spreads of the order of magnitude we have seen in the past weeks are not unprecedented by any means.
The problem I have with the TED spread is that higher recent spreads are being used as an indicator that credit has "dried up" and lending is at a standstill. Why do I resist this conclusion? Because of this chart:
So, gasoline prices rocketed from $1.50 a gallon to over $4.00 a gallon. Does this mean that gasoline purchases have stopped? Has the gasoline market closed up shop? Of course not. It just means the price went up. It is absurd to show me a price chart, which is what the TED spread graph is, and infer from it changes in the underlying transaction volume.
Though I would never have hired the guy, Ayers is a professor at a real public university, and what he has to say is particularly relevant given his ties to Barrack Obama. I find the behavior of Nebraska's conservative politicians to be especially absurd here -- after months of calling for more discussion and disclusore of Ayers and his ties to Obama, they want to prevent Ayers from speaking publicly?
Update: In an odd coincidence, at about the same time I was writing this post, the NY Times blog was posting on split infinitives.
An auction that netted $7.5 million in bids on 56 distressed Utah
properties fell through last week after the owners -- three banks and
two private lenders -- decided they may get a better deal by holding
out for the government's bailout plan.
"There were buyers, but we
couldn't sell the homes because free enterprise has gone out of the
market," said Eric Nelson, founder of Las Vegas-based Eric Nelson
His company on Sept. 30 put up for sale 56 foreclosed properties and lots, most of which are in Utah County.
auction, held in Salt Lake City, attracted thousands, including 200
bidders who bid between $275,000 and $615,000 for 10 luxury homes in
Midway and Murray that were appraised at between $525,000 and $652,000.
They bid between $26,000 and $100,000 for 44 custom lots in Mapleton,
Elk Ridge, Lehi, Alpine, Ogden, West Haven and Willard that were valued
between $112,000 and $290,000 a piece.
properties on the auction block included a $1.2 million unfinished home
in Draper, which attracted the highest bid at $615,000, while a 62-acre
parcel in Park City that's valued at $3.5 million, snagged the highest
bid at $1.125 million, said Eric Taylor Nelson, the company founder's
But all those bids were rejected late last week...
has never happened before. In the 25 years we've conducted lender-owned
auctions, we've consistently closed over 95 percent of all high bids,"
"The stock market's historic drop last week and
the bailout plan are some of the main reasons why the lenders rejected
the bids," he said. "They're thinking, 'Why sell the properties for 50
cents on the dollar when they may get 75 cents or 80 cents through the
Aaaarrrrggghhh- Typepad Put This Blog on New Editor, Which Sucks
The new Typepad editor is not at all ready for prime time. I cannot find a single new feature in it, but it is rife with bugs. Ones I have found so far:
Certain images will not upload correctly into a post. The Typepad folks do not know why
Twice I had a crazy error when all of the text and buttons in the "add link" popup window suddenly were inserted into the post
All my category setup was overwritten and I had to redo it all
The spell checker is awful. There is no "skip all" button. I used "IPCC" 50+ times in one post at my other blog, and had to hit skip 50 times over and over
The eliminated the blockquote editor option. Good job on a blog editor!
It is slow, slow, slow.
This is one of those enforced beta situations where all of use users are forced to do the beta testing they should have done. This is the one downside to web-based applications, because there is no way I can do a rollback to the old version.
Update: Also, publish is way slowed down. Sometimes it take several minutes to be able to see new posts on my blog. This one still has not appeared after hitting shift-refresh now for 3 minutes.
Update #2: They sent me an article to trumpet all the new features, but I could find not a single new feature listed. And it is probably a bad sign they felt the need to put this up front in the article:
If you are seeing the new compose, please be aware that it is not a beta version, it's an upgraded editor that you should be seeing.
Update #3: Getting good comments about Wordpress. I may have to check it out.
Economists will be poking through this situation years from now, and may well find the bunkers
empty of WMD's. Another trillion dollar commitment and unprecedented
expansion of executive power ramrodded on the back of fear mongering
and chicken-little crisis declaration.
Myth 1. Bank lending to non nancial corporations and individuals has declined sharply. Myth 2. Interbank lending is essentially nonexistent. Myth 3. Commercial paper issuance by non nancial corporations has declined sharply and rates have risen to unprecedented levels. Myth 4. Banks play a large role in channeling funds from savers to borrowers.
For some reason, Typepad put one of my blogs (but not my
others) on a new editor, probably as an involuntary beta. The new
editor is much, much slower, and has fatal bugs that make use of images
in posts virtually impossible. I have wasted a lot of time today.
This is actually a problem with online applications I had not
considered before. When I heard iTunes 8 was initially bugged or
learned to hate Vista, I would just avoid making the "upgrade." But
with online services, I have no choice but to accept the new version,
even if I consider it worse (as is so often the case nowadays in
Students Make $100 Financial Mistake: Very Alarming!
This story comes from the Arizona Republic as part of the general effort to maintain the ban on payday loan companies passed earlier this year (their is a proposition on the ballot in November to overturn the ban).
At least 5 percent of last year's freshmen at the University of Arizona obtained a payday loan, a figure the surveyor described as "very alarming."
Arizona's Norton School of Family and Consumer Sciences conducted
the survey, which measured the financial habits of 2,172 freshmen -
about a third of the class - who enrolled in fall 2007.
Student use of payday loans
more than doubled based on a survey taken a year ago that included
freshmen through seniors, said professor Soyeon Shim, the group's
"As consumers, students shouldn't be using payday loans as a resort to deal with financial stress," Shim said.
I wouldn't really recommend that students use this expensive form of ready cash, but I can't say I am particularly alarmed. How can any of us know what pressures they are under. In most circumstances, paying a 30% interest rate seems too high. But I know, from personal experience, there are times when short term liquidity is so valuable you might pay anything for it (just look - the American taxpayers are paying about a trillion dollars this year just for short-term liquidity).
In fact, if students have a bad experience, it's probably better to learn a $100 life lesson in college rather than a $500,000 life lesson later flipping condos on interest-only loans. I personally had my own caveat emptor eye-opener with Columbia House Records in college. Nothing like getting stuck with a couple of over-priced America albums to teach financial horse sense. Muskrat Love... aaaarrrggghhh!
Anyway, the effort to ban payday loans altogether is one of those elitist, snobby, holier-than-thou, we're smarter than you unwashed masses issues. Middle class homeowners who are upside down in their mortgages are not calling for inexpensive mortgages to be banned, they just want a government bailout. The government may spend a trillion dollars in the end supporting the mortgage market. But if poor people pay a high fee for a $100 loan, we have to ban the whole industry.
The fact is that there is always a demand for ready cash at high interest rates, and if you drive it under ground, people just go to Tony Soprano instead.
Oh, but you are not for banning payday loans, you just think the interest rates are too high, and that what is needed is government regulation of the rates? Uh, OK, I'm sure that will go well. Past government efforts to reduce the interest rate premium for risk have worked out really well *cough* mortgages *cough*.
But, if you are still thinking that you are much smarter in money management than people who go to payday loan stores and you really want to use the coercive power of government to force poor people to make the same decisions you would, here's this:
However, for those who think they are ever so much smarter than payday
loan customers, who are charged a lot of money for small liquidity
boosts, consider this: Let's say you take out $40 each week from an
ATM to keep you liquid and that the ATM fee is $1.50. You are
therefore spending $1.50 or 3.75% for a one week liquidity boost of
$40, which you must again refresh next week. Annualized, you are
effectively paying 195% to get liquid with your own money. For this kind of vig, at least payday loan customers are getting the use of someone else's money.
Despite recent declines, prices are still higher than they were a
year ago. But the recriminations over what went wrong have begun,
complete with calls for more government involvement, efforts to make
the industry more transparent and reforms to restore market confidence....
"[the market] is out of control," says H. Djusdil Akrim, director of a
factory in Makassar, Sulawesi's biggest city.... "It's a wild, wild market
-- and no one is running it," he says. "I think we need more
No one knows when the market will hit bottom. Some
traders are sitting on stockpiles they bought when the market was hot,
and if global growth slows further, as expected, demand could weaken.
Whatever happens, the latest volatility is a wake-up call for the ... industry, which has been growing steadily for years.
I blame George Bush. Oh, by the way, the industry is seaweed.
Venezuela's daily oil production has fallen by a quarter since President Hugo
Chavez won power, depriving his "Bolivarian Revolution" of much of
the benefit of the global boom in oil prices...
The state oil company, PDVSA, produced 3.2 million barrels per day
in 1998, the year before Mr Chavez won the presidency. After a decade
of rising corruption and inefficiency, daily output has now fallen to
2.4 million barrels, according to OPEC figures. About half of this oil
is now delivered at a discount to Mr Chavez's friends around Latin
America. The 18 nations in his "Petrocaribe" club, founded in 2005, pay
Venezuela only 30 per cent of the market price within 90 days, with
rest in instalments spread over 25 years.
The other half - 1.2 million barrels per day - goes to America, Venezuela's only genuinely paying customer.
Mr Chavez has given PDVSA countless new tasks. "The new PDVSA is
central to the social battle for the advance of our country," said
Rafael Ramirez, the company's president and the minister for petroleum.
"We have worked to convert PDVSA into a key element for the social
The company now grows food after Mr Chavez's price
controls emptied supermarket shelves of products like milk and eggs.
Another branch produces furniture and domestic appliances in an effort
to stem the flow of imports. What PDVSA seems unable to do is produce
Venezuela has proven reserves of 80 billion barrels,
but estimates suggest that it may possess 142 billion barrels - more
than anywhere else except Saudi Arabia....
this means that Venezuela has missed much of the benefit from the oil
boom and, now that prices are falling, Mr Chavez faces huge financial
problems. Nobody is sure at what point his government would be unable
to pay its bills, but most sources consulted believe this would
probably happen if oil falls to $80 a barrel. Yesterday, oil was
trading at $79.80.
Suspicious that the measures put in place after the attacks of
September 11 to prevent further such attacks are almost entirely for
show—security theater is the term of art—I have for some time
now been testing, in modest ways, their effectiveness. Because the
TSA’s security regimen seems to be mainly thing-based—most of its
44,500 airport officers are assigned to truffle through carry-on bags
for things like guns, bombs, three-ounce tubes of anthrax, Crest
toothpaste, nail clippers, Snapple, and so on—I focused my efforts on
bringing bad things through security in many different airports,
primarily my home airport, Washington’s Reagan National, the one
situated approximately 17 feet from the Pentagon, but also in Los
Angeles, New York, Miami, Chicago, and at the Wilkes-Barre/Scranton
Schneier and I walked to the security checkpoint. “Counterterrorism
in the airport is a show designed to make people feel better,” he said.
“Only two things have made flying safer: the reinforcement of cockpit
doors, and the fact that passengers know now to resist hijackers.” This
assumes, of course, that al-Qaeda will target airplanes for hijacking,
or target aviation at all. “We defend against what the terrorists did
last week,” Schneier said. He believes that the country would be just
as safe as it is today if airport security were rolled back to pre-9/11
levels. “Spend the rest of your money on intelligence, investigations,
and emergency response.”
Though I have to give props to the TSA for supporting first Amendment rights, I am not sure their concern over free speech and privacy was driving this encounter:
On another occasion, at LaGuardia, in New York, the
transportation-security officer in charge of my secondary screening
emptied my carry-on bag of nearly everything it contained, including a
yellow, three-foot-by-four-foot Hezbollah flag, purchased at a
Hezbollah gift shop in south Lebanon. The flag features, as its
charming main image, an upraised fist clutching an AK-47 automatic
rifle. Atop the rifle is a line of Arabic writing that reads Then surely the party of God are they who will be triumphant.
The officer took the flag and spread it out on the inspection table.
She finished her inspection, gave me back my flag, and told me I could
go. I said, “That’s a Hezbollah flag.” She said, “Uh-huh.” Not “Uh-huh,
I’ve been trained to recognize the symbols of anti-American terror
groups, but after careful inspection of your physical person, your
behavior, and your last name, I’ve come to the conclusion that you are
not a Bekaa Valley–trained threat to the United States commercial
aviation system,” but “Uh-huh, I’m going on break, why are you talking
It turns out, incredibly, that most airport employees are not screened. Because, you know, it would be grossly unfair to subject airport staff to the same sort of time-wasting indignities to which we all must acquiesce. Also, many commercial flights have a belly-full of US mail which I am pretty sure is not inspected in any way.
In 1850, the hottest topic in politics was slavery. But an awkwardness developed in the political parties. The Democrats were pretty clearly the pro-slavery party, or at least the conservative maintain the status quo party. But the Whigs, their opposition, were internally split on slavery. What that meant was that there was no obvious home for the voters who were against the expansion of slavery into the territories, or more radically, were for slavery's abolition. A Free Soil third party emerged, but the US has always seemed to seek out a two-party equilibrium. In just a few years, the Whigs collapsed, and the anti-slavery wing merged with the Free Soilers to form the Republican party. In the end, having no real contrast among the two major parties on the major issue of the day was unstable.
The only faint hope from this election for libertarians, particularly those concerned with economic freedom issues, is that it may finally highlight to lack of choice we have on these issues between the two major parties. A few examples like Jeff Flake notwithstanding, the Republican party under GWB and McCain have become virtually indistinguishable from the Democrats on most economic freedom issues. While I might have had hope 15 years ago that the Republicans could reinvent themselves as classical liberals, I now think this is demonstrated to be hopeless. Unfortunately, an 1850's style breakup of the party seems unlikely too. So I guess I don't have much hope after all.
The chief executives of the nine largest banks in the
United States trooped into a gilded conference room at the Treasury
Department at 3 p.m. Monday. To their astonishment, they were each
handed a one-page document that said they agreed to sell shares to the
government, then Treasury Secretary Henry M. Paulson Jr. said they must
sign it before they left.
“They weren’t allowed to negotiate.
Mr. Paulson requested that each of them sign. It was for their own good
and the good of the country, he said, according to a person in the
At least one banker objected. “But by 6:30, all nine chief
executives had signed — setting in motion the largest government
intervention in the American banking system since the Depression.”
A while back, in relation to a company called Terrapass that sells carbon offset certificates (or smugness coupons, as I called them) I observed:
My guess is that TerraPass, when it sells the electricity from these
projects to customers, is selling it on the basis that it is
earth-friendly and causes no CO2 emissions. This lack of emissions is
likely part of the "bundle" sold to electricity customers. But note
that this would be selling the same lack of emissions twice -- once to
TerraPass certificate holders, and once to the electricity customers.
I am sure they are both told they are avoiding X tons of emissions, but
it is the same X tons, sold twice (at least).
America's garbage dumps are reaping a windfall from the fight against
global warming. But their payday might not be doing much to reduce
For more than a decade, the landfill
here has made extra profit simply by collecting methane given off by
rotting trash, and selling it as fuel. Last year, the landfill learned
that doing this also qualified it to earn hundreds of thousands of
dollars via a new program that pays companies to cut their
Eliminating methane lets dumps sell
"carbon credits" to environmentally conscious people and companies. The
long-term goal of trading credits -- basically, vouchers representing
reductions in carbon dioxide and other greenhouse gases -- is to reduce
global pollution by encouraging others to cut emissions when the buyers
of the credits can't or won't cut their own.
"It seemed a little suspicious that we could get money for doing nothing,"
says Charles Norkis, executive director of the Cape May County
Municipal Utilities Authority, which has raised $427,475 selling
credits since February, or 3% of the authority's projected solid-waste
revenue for the year.
The sale of credits by these landfills
undermines a premise of the global fight against climate change. The
credit system was designed to encourage pollution cuts that wouldn't
have happened without a financial incentive. But the credits aren't helping the environment if they're merely providing extra profit for cleanups already made. And dumps already have an incentive to capture methane because selling it can be profitable.
One of the pieces of data that turns out to be nearly impossible to find is a direct comparison of the median income by quartile on a PPP basis between countries. In other words, how does the income of, say, the US lower quartile compare to other countries? There are a zillion sites with metrics of income inequality and GINI indexes and such, but to my mind these are meaningless. OK, the poor in the US are much less wealthy than the rich in the US, but how do they compare to the poor of other nations. The few studies I have seen have reluctantly (remember, these are leftish academics) admitted that the US poor do pretty well vs. the poor in other nations. Here is data for US vs. Europe.
Every African-American should wake up each morning and say "I give
thanks that my ancestors suffered the horrors of the slavery passage,
suffered the indignity and humiliation of slavery, and suffered the
poverty and injustices of the post-war South so that I, today, can be
here, in this country, infinitely more free, healthier, safer and
better off financially than I would have been in Africa."
I wanted to actually make this comparison more real. I used the CIA Factbook to estimate the share of per capita GDP on a PPP basis earned by the top decile, or top 10% wealthiest individuals, in a number of African nations (Example page here for Ethiopia -- calculation would be [25.5%/10%] x $700 per capita).
So here are the results:
Ethiopia top 10%: $1,785
Nigeria top 10%: $6,972
Zimbabwe top 10%: $800
Hopefuly this is enough of a sample to give you an idea of the range. Only South Africa is a real outlier from this range. Now, by the same methodology and source, here is the average share of the per capita GDP for the bottom 10% of earners in the US:
United States bottom 10%: $9,160
United States African-American avg (est): $32,060**
Wow! This means that the average person in the bottom 10% in the US, most of whom we classify as below the poverty line, would easily, by multiples and orders of magnitude, be in the top 10% richest people in most African nations. And the surviving decedents of those poor folks who got dragged to the US in slavery would be the Bill Gateses of their mother countries.
The point being, of course, that the size of the pie is typically more important than how you divide it up. And it is nearly an axiom that government efforts to divide the pie more evenly almost always make it smaller.
** estimated based on 2006 median black household wages being about 70% of the US median household wages. Yes, I know, we are wildly mixing apples and oranges here to get African American share of GDP per capita in the US, but its in the ballpark -- certainly close enough to make my basic point. And yes, I know there are flaws in measuring income across countries even on a PPP basis. If anyone knows of how to get this data more directly, please email me.
Bending Over Backwards to Try to Show Wage Stagnation
The media is really bending over backwards to find ways to twist earnings data for average Americans to try to make the point that real income for many folks has stagnated or dropped. They are doing this to support a two-pronged legislative strategy in the next Obama administration:
Use the power of the government to further tilt the balance towards unions and against employers in wage negotiations (this strategy having worked out so well to create prosperity in the automobile and airline industries)
Further modify the income and Social Security tax structures to make them even more regressive than they are today.
They are firing on all cylinders behind this strategy. They are even mobilizing the neo-Keynesians to make the pitch that the Great Depression and the current financial crisis were caused by a shift in wealth from laborers to the capital classes, and that the only way to prevent future crises and depressions is to, wait for it, increase the power of unions and institute more wealth redistribution (Example here, via Kevin Drum).
I was going to do a post fisking the James Livingston article linked above on Kevin Drum's site, but Livingston's hypothesis was such a mess that it was just going to take too much of my day. But in doing some research, I found this chart from a couple of years ago in the NY Times that really caught my attention:
Talk about chutzpuh -- look at the lede on the chart and then look at the chart itself. Yes, the lede is correct, but only if you choose the totally meaningless number of "cash wages" rather than total compensation. If one looks at total compensation (or what they call "overall" compensation), the entire argument falls apart. Workers have maintained about their same "share" of the economy.
Sure, a large percentage of that is now in health care benefits, but that's a choice workers have made (and the government has encouraged through tax policy). In fact, this compensation mix has been driven in large part by the Left's beloved unions, so on what basis can folks say that these other benefits somehow "don't count?" Certainly, they cost their employers equally, whether it is cash or health care. Corporate profits are up a bit, but in line with their normal historical levels in the 1950s and 1960s, the golden age of the US economy, according to the Left. (By the way, the pattern of falling wage shares and rising profit shares after recessions is a well-documented one. Wage-earners do best at the end of an economic cycle, employers more towards the beginning. The chart cut off after 1997 would look about the same as the last several years).
I will tell you right now that every time you hear someone bemoaning the stagnation of wages, they will never, ever, ever be talking about total compensation per individual. Having, through government policy and union activity pushed the compensation mix to non-cash elements, they then play a heads-I-win-tails-you-lose game of not giving any credit for those compensation elements.
Other games that are played to try to make the case that real earnings have stagnated include:
Time frame selection. Everyone making this argument will choose 2000 as a starting point. They justify it by saying it is the beginning of the Bush years, but 2000 is really selected because it is a pre-recession peak, and they have to measure peak-to-trough of the economic cycle to try to make their point. Just as an example, if you look at the household income numbers below, you can see there is very typically a 5-year drop after a recession followed by net gains. If we chose, say, the first Clinton term we could play the same game, showing a peak-to-trough drop in real incomes.
Household income game. The household income numbers are fraught with peril, because companies don't pay households, they pay individuals. And household makeups are changing simultaneous to income changes. For example, imagine the economy was just my household. If my wife were to get fed up with my shtick and divorce me tomorrow, average household income would drop by 50% in one day (as our total income stays the same but we go from one to two households). If my wife were to go back to her high-paying pre-kids job tomorrow (if only it were so!) our household income would go way up, in part because the labor department does not capture the value of the labor she provides at home. Mark Perry has a lot more on the household income numbers here, but he shows that the household size number has been changing a lot, causing the metric to understate income changes per individual:
Individuals matter. Median income looks at the middle person on the ranked list of US incomes. So, for example, if there are 100 million income earners, the median income is the income of number 50 million on this list. But whoever the person is at spot 50 million is almost certainly not the same person who was at spot 50 million last year. They might have fallen on the list, but the odds are they moved up. As folks age and gain experience and/or seniority, they tend to increase income faster than inflation. Most minimum wage earners, for example, tend to be under 25. The number of families supporting three kids on minimum wage (at least of the primary bread-winner) at the age of 45 is really, really low, despite the anecdotes we are bombarded with in the media.
Immigration has a huge effect. The total number of foreign born people in the labor force is estimated around 21 million, of which perhaps 6.3 million are illegal immigrants. Positing that at least 10 million of these arrived in the last two decades, and that many of these folks began at relatively low, below-median incomes, means that median incomes are hugely affected by immigration. Leaving immigrants out so the comparison is close to apples and apples, to find the true median income gain over the last 20 years one would have to count up 10 million or so spots on the list.
Again, as in the previous point, most individuals can be better off even if the median stagnates (presumably immigrants coming in at the bottom are also better off, even at the bottom, than where they were before, or they would not have come. We often forget that much of our bottom quartile of income in this country would be upper middle class in many other nations). This is a classic mix problem that most people, and the media, almost always get wrong. In a situation with a changing mix of multiple groups, each of the groups can be improving on some metric, but the overall metric can go down. You can see the income stats by race here. Every race group has increasing median income, but since the Hispanic group has grown 8x faster than the anglo population in the US, the total results are mixed downwards.
Here is a quick example. Group A has values of 5,6,6,7. Group B has values of 1,2,3. Ten years later Group A is the same size and has values of 6,7,7,8. Group B has doubled in size, and now has values of 2,3,4,2,3,4. In these examples, every single individual has a higher value. Also, Group A's median has increased from 6 to 7, and Group B's has increased from 2 to 3. But the median for the whole combined group A+B has dropped from 5 to 4. Both medians (and averages) can do funny things when mix is shifting.
Even the NY Times. The NY Times actually makes two of these points for me in another article, arguing that historic median income drops were concentrated in areas of high immigration, and reported drops were due to the choice of the economic peak as a starting point. WOW? Is this the same NY Times I began this post criticizing. Yes it is, the only difference is that this article ran in 2001, when they were reporting on the economy during a Democratic administration.
Income taxes are already wildly progressive. While I would love to be in that top 1% group, I don't really begrudge them their success. Besides, who can look at the chart below, again from Mark Perry, and come to the conclusion that the top 1% are being treated unfairly generously.
Every country that has implemented this plan (government-backed unions and wildly progressive tax policy), including most of Western Europe, is demonstrable worse off than the US on absolute measures. This is both the median, but also in every quintile, including the poorest. While it is true the poorest quintile has a bigger gap from the riches in the US vs. France for example, on an absolute basis our poorest are at least as well off (particularly when differences in immigration policy are taken into account).
I have for quite a while been a big supporter of OpenOffice 2.0 as an alternative to MS Office. It is free, and it tends to be quite compatible with MS Office file formats. In fact, I use the Open Office spreadsheet to open and fix Excel spreadsheets that Excel corrupts and cannot open.
We've Apparently Run Out of Stuff to Be Worried About
The lesson I take from the numerous efforts to regulate/ban/demonize bottled water is that we have officially run out of real stuff to be worried about. Seriously, when bottled water is the health and environmental risk of the decade, it is time to declare victory over Mother Nature. More here.
I am on vacation this week, so blogging will be light. Just as well, as I have absolutely no idea where to begin with the Federal plan to semi-nationalize the banking industry. I fear that the Bush administration has done it to us again. Economists will be poking through this situation years from now, and may well find the bunkers empty of WMD's. Another trillion dollar commitment and unprecedented expansion of executive power ramrodded on the back of fear mongering and chicken-little crisis declaration. Henry Paulson screams to the world that the sky is falling, and then wonders why he can't stop the panicked stampede. The Fed breaks the discount window wide open and promises to lend and recieve near infinite amounts of bank funds, and then wonders why banks have stopped lending to each other and only will do business with the Fed.
Many legal academics claimed that courts should serve as fire walls
against the conflagration of fear. When the government locks someone
up, the courts should realize that in many cases either government
officials have panicked or are violating someone’s civil liberties
merely to assure frightened citizens that something is being done. For
that reason, courts should treat the government’s justifications with
skepticism, and never ever trust the executive branch.
These arguments have not yet surfaced in the current crisis. The
specter of fear is everywhere, not just on Wall Street. And the scale
of the government’s reaction is no less than what it was after
9/11—that is what probably scares ordinary people the most. Yet no one
who believes that the government exploited fears after 9/11 to
strengthen its security powers is now saying that the government is
exploiting financial crisis fears in order to justify taking control of
credit markets. No one who thinks that government would use fear to
curtail civil liberties seems to think that government would use fear
to curtail economic liberties. Why not?
I find it surprising that you take this administration
on faith in its declaration of emergency in the financial sector.
You've lamented for years about the "rush to war" and GWB's scare
tactics that pushed, you felt, the nation into a war it should not be
fighting, all over threats of WMD's that we could never find. You
lamented Democrats like Hillary Clinton "falling for this" in Congress
But now the mantra is the same - rush, rush, hurry, hurry, fear,
fear, emergency, emergency. Another GWB declared crisis in which the
country needs to give the administration unlimited power without
accountability and, of course, stacks of taxpayer dollars to spend. A
decision that has to be made fast, without time for deliberation.
Another $700 billion commitment. And here the Democrats go again.
Jeez, these guys may have the majority in Congress but it is sure easy
for GWB to push their buttons when he wants to. Heck, Pelosi is acting
practically as the Republican Whip to get GWB's party in line.
This is Iraq without the body bags, and without the personal honor
of brave soldiers in the trenches to give the crisis some kind of
This is a little flawed, since we would expect a constant trend to be a constant percent increase each year, which would be upward curving on this chart, not a straight line trend (it would be straight on a log scale). Never-the-less, it makes a point (by the way, it is interesting the 1980's are considered the decade of greed on Wall Street rather than the 1990s, from this chart).
Here is a better way to make my point. We get a similar chart if we look at PE ratios for the S&P500 (the chart below is on trailing 10 year average earnings).
Why is this anything but depressing? Because I get the sense that many people, without any other general indicator of how bad things are in the financial markets, are using the steep drops in the stock market as a proxy measure. The stock market looks like a disaster, so everything else must be a disaster.
But in a large sense, at least so far, all the stock market has done in the last 2 weeks is return to historical norms. This tells me that there is nothing about the current level of the stock market that is screaming disaster signals. In fact, the current level of the stock market is screaming normalcy.
Of course, this does not mean the drop will stop here. PE's in the worst of times have headed on down to 5 (which would be about DOW 3000, yuk). And corrections seldom stop at the mean - they usually over-correct on below the mean. But seen on these charts, this recent move looks more like the completion of the correction to the late 1990's bubble rather than necessarily an indicator of current financial disaster.
The best way to mobilize people is to make them panic. That is why so many institutions have incentives to may you panic over the environment, or global warming, or the threat of terrorism, or the economy. In most cases (Naomi Klein's hypothesis not-withstanding) these folks want you to get so worried you will give up something, either money or freedom or both.
Some kind of recession at this point is unavoidable, I guess. But in fact, we really haven't seen what I would call a real recession since the early 1980's. We've had a really long run, and now its time to cut back on that spending and board up the financial windows for a little while. The economy has to de-leverage itself some, and that is going to slow things down for a while. People keep talking about the Great Depression, and I don't see it. I don't even think its going to be the 1970's.
The most visible symbol of financial problems seems to be the falling stock market. But all those companies in those indexes are the same ones that were there a month ago, and are still healthy and making money. The fall in the markets does not represent and change in the current health of industrial America. The lower prices reflect a changing expectation about those company's future prospects, but the folks driving the market are just guessing, and really, their guesses aren't really any better than yours or mine. Similar expectations drove oil up to $145 and now back down under $80. Wall Streeters work really hard to portray themselves as smarter than you or I, but they are not. I went to school with them. I know these guys. They aren't smarter, and they aren't any less susceptible to panic. In fact, because they are often highly leveraged and are worried about making payments on that new Jaguar they just bought for their mistress, they tend to be more easily stampeded.
In October of 1987, the stock market fell 22.6% in one day. If you date the current financial issues to about September 22, when the market closed around 11,000, then the market has fallen over these tumultuous weeks by 22.0% at last night's close -- dramatic, but still not as bad as the one day drop in '87.
Proof Positive Legislators Don't Understand Even the Basics of Economics
OK, actually, this could also just be proof positive that legislators know exactly what they are doing and want legislation that panders to powerful interest groups without actually doing anything. Democrats in Congress have proposed a new nationwide CO2 emissions / permitting system. The point is to allocate permits for something less than current emissions, forcing Americans to either cut back to their permit level or trade permits around.
So I thought this provision was hilarious:
The bill tries to address the economic concerns by excluding small
businesses and increasing the number of permits when prices spike.
So when permit prices go up, they will increase the number of permits. But permit prices will necessarily go up if they are doing their job of limiting emissions below current levels. So, in effect, they are saying that if the permit process really does start limiting emissions, new permits will be issued to to allow more emissions.
Why Politicians Favor Cap and Trade over a Carbon Tax
There are a lot of incrediblygoodreasons to favor a carbon tax over cap-and-trade if we simply most reduce CO2 emissions. Even a minor inspection of the inner workings of the California Air Resources Board under their AB32 cap-and-trade style program provides lists of examples of abuses, rent-seeking, inefficiency, etc. under cap-and-trade. But Joe Nation, one of the California legislators who authored AB32, told me that he could not get even a 5-cent gasoline tax through a legislature that enthusiastically embraced the 100x (or more) expensive AB32. Why? Silly rabbit, because public costs of cap-and-trade can be fudged, hidden, ignored, and, when they absolutely have to be recognized, blamed on private companies.
Napolitano brushed aside questions of what effect the plan will have on utility rates.
"First of all, that it may increase electric bills doesn't mean it will increase them now," Napolitano said.
Brave, isn't she? They are already preparing the story line to blame private industry for future price increases:
Napolitano said there is "lots of data" to suggest that utilities
eventually will be able to save money "by moving to a system of 'green'
Fox said that, on a long-term basis, there may be cost savings.
You get that? We smart government guys conducted a lot of really high-power circle jerks among graduate students and the consensus was that forcing the electrical industry to obsolete much of its current capacity and rebuild with some other uproven but more expensive technology would save them money in the long term. If utilities raise prices, it's because they were not smart enough to figure out what we already know and they are just greedy capitalist pigs so blame them for the price increases, not use faithful public servants. You see? Cap-and-trade is like money laundering for taxes. The tax is there, but its hidden well enough that a lazy media will not bother to trace it back to its owner.
The exact goals are hazy, but it appears our governor has committed the state to cutting CO2 emissions by 15% over the next 10 years. One of the main ways that calling CO2 "pollution" is misleading is to imply it is some kind of combustion by-product, like soot or SO2, that could be scrubbed out. But it is not. It is fundamental to combustion. So a 15% cut in CO2 emissions is 10-15% cut in power generation (we likely get numbers lower than 15% by assuming cuts in production are preferentially from higher carbon sources like coal plants).
So, basically this law requires the state's electrical utilities to obsolete 10% of its installed capacity, and either a) have tons of rolling blackouts; b) raise prices enough to force a large cut in demand (remember, demand must be cut 10% AND all future growth must be halted); or c) the industry must spend hundreds of billions of dollars to build a ton of capacity in some other technology. Option a will never fly politically. Option c is almost sure to fail as well. The permitting and construction processes can take decades. From a cold start, I don't think its possible to rebuild 10+% of the states generation capacity in 10 years, either in nuclear or some other not-yet-ready technology. The numbers simply don't work. The only possible way I can imagine is maybe to install a zillion natural gas turbines, but to make the CO2 balance work out, you probably would have to rebuild 15% or more of the capacity, not just 10%, because there would still be some carbon emissions.
Really, realistically, one is left with option b. Prices are going to go up (just they would have to in option c to pay for replacement production capacity). The price increases would be about as much as the carbon tax would have had to be to get the same effect, but price increases are corporation's fault while taxes are politicians' fault. See? The only good news is that the price increase will go to private players rather than the government. That is until someone thinks to put in a windfall profits tax on utilities that are making lots of money on the government-enforced shortage.
Laws that require the goodwill and ethical functioning of its participants, without oversight, always worry me. The companion argument to this is when someone says (and this is popular among Democrats nowadays) all this infrastructure in the government that does not work will be fine when we get our own smart people running it.
The Maryland State Police classified 53 nonviolent activists as
terrorists and entered their names and personal information into state
and federal databases that track terrorism suspects, the state police
chief acknowledged yesterday.
Police Superintendent Terrence B.
Sheridan revealed at a legislative hearing that the surveillance
operation, which targeted opponents of the death penalty and the Iraq
war, was far more extensive than was known when its existence was
disclosed in July....
Said the unrepentant leader of this efort:
"I don't believe the First Amendment is any guarantee to those who wish to disrupt the government," he said.
Reading my history, disrupting the government was not the last thing they were trying to protect, it was the first thing.
Fake but Accurate -- Now Coming to the Hard Sciences
Most of us remember the famous "fake but accurate" defense of Dan Rather's story on GWB using forged National Guard documents. If the post-modernism movement were to have an insignia, their tag line (their "E. Pluribus Unum') could well be "fake but accurate."
those of you who cling to scientific method, this is pretty bizarre
stuff. But she, and many others, are dead serious about it. If a
research finding could harm a class of persons, the theory is that
scientists should change the way they talk about that finding. Since scientific method is a way of building a body of knowledge based on skeptical testing, replication, and publication, this is a problem.
The tight framework of scientific method mandates figuring out what would disprove the theory being tested and then looking for the disproof.
The thought process that spawned the scientific revolution was
inherently skeptical, which is why disciples of scientific method say
that no theory can be definitively and absolutely proved, but only
disproved (falsified). Hypotheses are elevated to the status of
theories largely as a result of continued failures to disprove the
theory and continued conformity of experimentation and observation with
the theory, and such efforts should be conducted by diverse parties.
Needless to say postmodernist schools of thought and scientific method are almost polar opposites.
While the critic's advice - to use trained statisticians in studies
reliant on statistics - may seem too obvious to need stating, the
"science is settled" camp resists it. Mann's hockey-stick graph may be
wrong, many experts now acknowledge, but they assert that he
nevertheless came to the right conclusion.
To which the critics,
and doubtless others who want more rigourous science, shake their heads
in disbelief. They are baffled by the claim that the incorrect method
doesn't matter because the answer is correct anyway. With bad science, only true believers can assert that they nevertheless obtained the right answer.
A huge number of physicists and geologists who actually take the time to look into the details of climate science come away being shocked at the scholarship. Take a world class physicist, drop him into a discussion of the details of the Mann hockey stick analysis, and in an hour you will have a skeptic.
Crazy? Remember the words of from National Center for Atmospheric Research (NOAA) climate researcher and global warming action promoter, Steven Schneider:
have to offer up scary scenarios, make simplified, dramatic statements,
and make little mention of any doubts we have. Each of us has to decide
what the right balance is between being effective and being honest.
One argument about regulation that seems to be gaining traction through the recent financial crisis is "See, private action and enterprise is not infallible. They can make mistakes that have costs for everyone. Therefore they need to be regulated."
I don't have time for the full refutation of this, but a few thoughts:
No one ever said that private actors in the economy are infallible or even universally honest. However, no one has ever been able to make the case that government employees are any more infallible or honest.
There are a couple of reasons government regulators are going to be demonstrably worse than the marketplace in making decisions. The first is information -- a few actors in Washington can never have the same access to information as thousands of actors across the country or around the world. The second is incentives -- while regulatory hawks cite private greed as a bad incentive in the marketplace, bureaucratic incentives can be at least as problematic.
Governments are subject to all sorts of rent-seeking initiatives, not to mention regulatory capture, that undermine regulatory effectiveness. Just look at the bailout bill. Wooden arrows?
For some reason, the argument "private actors screwed up" seems sufficient justification for regulation. The burden of proof should instead be "the government could have done better."
QUICK: If you imagine where things will go with Fannie and Freddie, and
you think about the regulators, where were the regulators for what was
happening, and can something like this be prevented from happening
Mr. BUFFETT: Well, it's really an incredible case study in regulation because
something called OFHEO was set up in 1992 by Congress, and the sole job
of OFHEO was to watch over Fannie and Freddie, someone to watch over
them. And they were there to evaluate the soundness and the accounting
and all of that. Two companies were all they had to regulate. OFHEO has
over 200 employees now. They have a budget now that's $65 million a
year, and all they have to do is look at two companies. I mean, you
know, I look at more than two companies.
BUFFETT: And they sat there, made reports to the Congress, you can get
them on the Internet, every year. And, in fact, they reported to
Sarbanes and Oxley every year. And they went--wrote 100 page reports,
and they said, 'We've looked at these people and their standards are
fine and their directors are fine and everything was fine.' And then
all of a sudden you had two of the greatest accounting misstatements in
history. You had all kinds of management malfeasance, and it all came
out. And, of course, the classic thing was that after it all came out,
OFHEO wrote a 350--340 page report examining what went wrong, and they
blamed the management, they blamed the directors, they blamed the audit
committee. They didn't have a word in there about themselves, and
they're the ones that 200 people were going to work every day with just
two companies to think about. It just shows the problems of regulation.
The problem, of course, is that Fannie and Freddie were doing exactly what Congress wanted them to do -- systematically lowering mortgage underwriting standards. They won't put it that way now, but that is what spreading home ownership to lower income families really amounted to.
A Simple Alternative to Mark to Market Accounting?
I haven't posted at all on the brouhaha about mark-to-market accounting of derivatives and whether it was a contributor to the recent financial mess. If I had to summarize the issue, I would describe it thus: Investors want something more trustworthy than just management estimates of the value of complex securities -- so they would like an outside market-based reference point -- but the very complexity that makes these contracts hard to value as an outsider also tends to make their markets illiquid and volatile, making it difficult to get a good market value.
Requiring the asset and liability sides of derivatives to be separately
measured and reported seems like an amazingly simple fix that could
simplify regulation of the financial and insurance industries, reduce
the need for the disclosures in financial statements written so as to
discourage one from reading them, and help investors more easily assess
This certainly seems reasonable to me. When one buys a revenue producing asset with debt financing, the two are listed separately as an asset and a liability, rather than as one "net" asset, even though they may be inextricably linked (say if the asset is collateral for the loan and the loan has high pre-payment penalties). Any thoughts? Does this make sense, or is it naive?
I think a lot of economists are of two minds about Obama. When they look at his economics team, they are impressed with the talent and depth. America could do worse than have economic policy guided by this team. But when Obama opens his mouth to express his own opinions on trade or economics or finance, I get really nervous. I keep wondering who will guide economic and energy policy -- his smart staff, or the Obama his smart staff keeps trying to hide.
Robert Bryce, the author of Gusher of Lies, one of the best books on
global energy issues you will ever read, is also a co-editor of Energy
Tribune, a leading monthly. In the October edition, he takes aim at
ethanol calling it a scam and “pure, unadulterated lunacy.”
writes, “Barack Obama doesn’t want to talk about corn ethanol. And it’s
no wonder. In early August, his campaign Web site purged several
sections of his energy plan that talked about corn ethanol.
the purge, Obama was touting corn ethanol as a pivotal element in his
push for ‘energy independence.’ His site declared that Obama ‘will
require 36 billion gallons of renewable fuels to be included in the
fuel supply by 2022 and will increase that to at least 60 billion
gallons of advanced biofuels like cellulosic ethanol by 2030.”
August, however, Obama had come up with a new set of talking points on
energy and “All mentions of corn ethanol were removed,” wrote Bryce.
“The word ‘ethanol’ only appears once.”
Do not be fooled. Obama
is a major proponent of ethanol. Bryce reports that, “In January 2007,
Obama and two other senators, Democrat Tom Harkin of Iowa and
Republican Richard Lugar of Indiana, introduced legislation called the
‘American Fuels Act of 2007.’ It aimed at promoting the use of ethanol
and provided mandates for the use of more biodiesel.”
national campaign co-chair is Tom Daschle, the former Senate majority
leader and longtime ethanol booster. Daschle serves on the boards of
three key ethanol companies. Obama represents Illinois, a state that
trails only Iowa and Nebraska in ethanol production capacity.
The Federal Reserve Board on Tuesday announced the creation of the
Commercial Paper Funding Facility (CPFF), a facility that will
complement the Federal Reserve’s existing credit facilities to help
provide liquidity to term funding markets. The CPFF will provide a
liquidity backstop to U.S. issuers of commercial paper through a
special purpose vehicle (SPV) that will purchase three-month unsecured
and asset-backed commercial paper directly from eligible issuers.
Kedrosky has a lot of interesting coverage of the current financial crisis. He observes:
As Buffett has said, everyone in the world is trying to deleverage at
once -- which is unworkable -- leaving the U.S. as the only institution
in the world that can lever up at all -- and levering up it is. I just
wish it was more obvious to me how you exit the other side of programs
like this. Would we not be better off to quickly recapitalize and
backstop some banks?
I share his concerns, but I actually kind of like the idea of bringing liquidity to main street business directly, rather than indirectly by bailing out failing financial institutions. The problem of unwinding the program is a big one. Right now, I get the sense that the financial markets are operating almost entirely on expectations of government action - will the Feds buy back mortgages, will the Feds keep the overnight borrowing window wide open, will the feds gaurantee commercial paper, how much commercial paper will they buy. This latter actually seem the least bad of a lot of other options. At least the Feds are buying good assets from good companies.
At first, I thought this was an interesting article in the battle of urban planners against suburban "sprawl." Here is the voice of the often silent majority, who like suburbs and don't want a bunch of high-density mini-Manhattans :
Jones and his neighbors moved to Laveen's low-scale subdivisions in
hopes of finding a suburban life near the heart of the Valley, where
they could enjoy large, affordable homes a few miles southwest of
"We had the opportunity to buy a brand-new home we could afford, and
we had a view of downtown," Pacey says. "The potential to make this as
wonderful as other areas of Phoenix is huge."
The story has the typical highly-connected former politician turned developer (is there another kind?) using his unique access to his old zoning cronies to manipulate regulation for personal profit:
Then Paul Johnson, a former Phoenix mayor, proposed taking a mostly
vacant 27-acre parcel a few blocks east of Jones' home and building 517
apartments and townhouses on it.
The property was zoned for one house to the acre. It abuts a
two-lane road where the speed limit, when two nearby schools are in
session, is 15 mph. And the nearby intersection of 27th and Southern
avenues, which provides access to downtown Phoenix, is still controlled
by stop signs.
Schools in the neighborhood already were overcrowded, and residents
were concerned about the police's ability to keep up with calls for
service. Where were all these new people going to go?
"They've done so much building in Laveen that the infrastructure has
not kept up," says Jones, an auditor who had no previous involvement in
Despite a resident outcry and opposition from Michael Nowakowski,
the councilman who had just been elected to represent the district, the
council approved the rezoning 7-1 on Dec. 19.
Johnson gets extra bonus points as the urban-chic villain, expressing the superiority of sitting in cafes to, say, having a back yard.
As a former mayor, Paul Johnson is familiar with residents' arguments against high-density developments.
"They feel that any time you have additional density, that it means
a lower quality," he says one morning over coffee at Biltmore Fashion
Park. "The counter to that is this."
Johnson gestures across Camelback Road to the high-rise apartments and townhomes near 24th Street.
"I look out across the street, and there's a lot of density there,"
he says. "But I'm also sitting in a pretty nice cafe. I have a nice
place to sit. And there's a lot of other people here who think it's a
But it turns out that there are no good guys in this story, as is often the case for your poor libertarian correspondent. Because, the opponents of such development are turning to the ballot box, converting property decisions from individual ones made by the property owner to group decisions made on election day. What can be built on this particular property may well be decided at the ballot box, just as I discussed another parcel of land whose fate will be decided not by its owner, but at town elections in November.
Sometimes, the reaction to government control is a bid for de-regulation. But more often, it merely results in a scrap for power, as parties ignore the question of whether the government power should exist at all, and instead fight over who gets to wield it.
For the most part, it has been up to city councils to decide how
much density one neighborhood can tolerate. If Jones is successful,
they could lose some of that power.
"It speaks to the age-old dilemma of representative democracy versus
direct democracy," said Paul Lewis, an assistant professor of political
science at ASU. "There's always an issue with land use because what
might be in the overall interest of the city might still be seen as a
detriment to its immediate neighborhood."
This is all very depressing. No mention of any age-old question between individual rights and government power. For these guys, the "city" and the "neighborhood" are somehow real entities with more rights than actual people.
For centuries we have had a perfectly serviceable approach for determining who gets to decide what gets built on a piece of land: ownership. If one wanted to control a property, she/he bought it. But the desire to control property without really owning it is a strong one, and a driving force for much of government regulation.
One of the things I have always found frustrating and confusing is the number of folks who call themselves "civil libertarians" who simultaneously have not problem with economic and nanny-state hyper-regulation. In fact, ACLU types are often at the leading edge of calls for more regulation on safety or prices or property or whatever.
I have never been able to understand how the two are not inextricably linked. How can bright-line protections of freedoms of choice and action be essential in one sphere of our lives but unimportant in others? Here is just one example of how they work together, from none other than our egregious Sheriff, Joe Arpaio:
Arrest records from crime sweeps conducted by the Maricopa County
Sheriff's Office add substantial weight to claims that deputies used
racial profiling to pull Latino motorists over to search for illegal
even when the patrols were held in mostly White areas such as
Fountain Hills and Cave Creek, deputies arrested more Latinos than
non-Latinos, the records show. In fact, deputies arrested among the
highest percentage of Latinos when patrols were conducted in mostly
On the arrest records, deputies frequently cited minor traffic
violations such as cracked windshields and non-working taillights as
the reason to stop drivers.
"These are penny-ante offenses that (police) almost always ignore. This
is telling you this is being used to get at something else, and I think
that something else is immigration enforcement against Hispanic
people," Harris said....
Brian Withrow, an associate professor of criminal justice at Wichita
State University, said racial profiling is very difficult to prove.
States have thousands of traffic laws on the books, so police can
almost always find a reason to stop someone. The U.S. Supreme Court has
ruled that police can legally use minor traffic violations as a
"pretext" to stop someone they suspect of other crimes. Withrow said
the only way to prove racial profiling is by looking at large numbers
of traffic stops to see if "patterns and practices" of selective
enforcement exist. Otherwise, it's difficult to tell whether police are
stopping motorists for legitimate reasons or merely based on race or
Withrow agreed that the arrest records alone are inconclusive. But
he found it troubling that they show that Latinos were arrested more
frequently than non-Latinos even when the patrols took place in mostly
White areas such as Fountain Hills.
"That tells me that that is who is being targeted," Withrow said.
OK, I know burn-out is setting in. I certainly think that explains, in part, why the House voted for a demonstrably worse bill than they voted against the week before. But John Moore has a number links to an interesting set of charts from the Milken Institute on the financial meltdown.
They hit on many of the things I discussed earlier, but put a greater emphasis on 1) securitization, and the effect it had on good underwriting standards and 2) on interest rates as a driver of the housing bubble.
Update: And an interesting post on the link between credit default swaps and short-selling. My personal view is that credit default swaps will someday be looked at like earthquake insurance -- nice premiums today, but too much systematic risk, too much certainty that in 10 or 20 years there will be an event that forces nearly every policy to pay simultaneously, wiping out the insurer. You can't get earthquake insurance, and you nearly can't get hurricane insurance, and I think the default insurance market may go the same way. Or, as a minimum, the price is going so high few people will buy it. This is not a market failure, it is a market lesson learned and adjustment to reality.
It Took Two Ingredients to Make this Financial Crisis
After having time to think more about the current crisis, I think the reason it is confusing is that it is the result of two parallel but largely independent causes that worked together to create this mess. I told my mother-in-law in an email last week that the financial crisis would likely be a Rorschach test where everyone sees the crisis caused by all the things they opposed before the crisis. Conservatives will see government intervention, liberals will see greed and deregulation.
What makes this situation particularly confusing is that of the two causes I believe led to the crisis, each has been embraced by one of the two parties as the only cause. It's a case where everyone is half right, but the other half is important too. It's a two part recipe, with neither active ingredient causing much of an explosion until mixed with the other. (special thanks to the folks at Q&O who have had a lot of good posts on these issues).
Cause 1: Creating the Asset Bubble
The first thing that had to happen for the crisis was the creation of an asset bubble. We need some type of over-valued asset whose prices crash to earth to spark the crisis. So we begin with housing.
Home prices have gone through boom-bust cycles for years, just as have many commodities. There is a whole body of literature on such cycles, so we will leave that aside and accept their existence as a feature of markets and human behavior.
But this housing bubble had a strong accelerant, in the form of the Federal government. For years, this nation has made increasing home ownership a national goal and many laws and tax policies have been aimed at this goal. The mortgage interest deduction on personal income taxes is just one example.
Fannie Mae, the
nation's biggest underwriter of home mortgages, has been under
increasing pressure from the Clinton Administration to expand mortgage
loans among low and moderate income people and felt pressure from stock
holders to maintain its phenomenal growth in profits.
addition, banks, thrift institutions and mortgage companies have been
pressing Fannie Mae to help them make more loans to so-called subprime
borrowers. These borrowers whose incomes, credit ratings and savings
are not good enough to qualify for conventional loans, can only get
loans from finance companies that charge much higher interest rates --
anywhere from three to four percentage points higher than conventional
''Fannie Mae has expanded home ownership for millions of
families in the 1990's by reducing down payment requirements,'' said
Franklin D. Raines, Fannie Mae's chairman and chief executive officer.
''Yet there remain too many borrowers whose credit is just a notch
below what our underwriting has
Beginning in 1992, Congress pushed Fannie Mae and Freddie Mac to
increase their purchases of mortgages going to low and moderate income
borrowers. For 1996, the Department of Housing and Urban Development (HUD) gave Fannie and Freddie an explicit target — 42% of their mortgage financing had to go to borrowers with income below the median in their area. The target increased to 50% in 2000 and 52% in 2005.
For 1996, HUD required that 12% of all mortgage purchases by Fannie and Freddie be "special affordable" loans, typically to borrowers with income less than 60% of their area’s median income. That number was increased to 20% in 2000 and 22% in 2005. The 2008 goal was to be 28%. Between 2000 and 2005,
Fannie and Freddie met those goals every year, funding hundreds of
billions of dollars worth of loans, many of them subprime and
adjustable-rate loans, and made to borrowers who bought houses with
less than 10% down.
Fannie and Freddie also purchased hundreds
of billions of subprime securities for their own portfolios to make
money and to help satisfy HUD affordable housing goals. Fannie and
Freddie were important contributors to the demand for subprime
Simultaneously, the 1977 Community Reinvestment Act was pushing private banks to make more loans to less qualified borrowers:
The Community Reinvestment Act (CRA) did the same thing with
traditional banks. It encouraged banks to serve two masters — their
bottom line and the so-called common good. First passed in 1977, the
CRA was "strengthened" in 1995, causing an increase of 80% in the
number of bank loans going to low- and moderate-income families.
These actions had a double whammy on the current crisis. First, by pushing up housing demand, they inflated the housing pricing bubble. Second, it meant that these inflated-price homes were being bought with lower and lower down payments. In effect, individuals were taking on much more leverage (leverage is a term that I will use to mean the percentage of debt used to finance a set of assets -- more leverage means more debt and less equity. The term comes from the physics of a mechanical lever, in that more debt, like a lever, can magnify force. Profits from assets are multiplied by leverage, but, alas, so are losses.)
When the economy softened and the housing bubble started to burst, these new mortgage customers the government went out of its way to bring into the system did not have any resources to handle the changes -- they did not have the down payment to cushion them (or the banks) against falls in asset value and did not have the cash flow to cushion them against falling income in the recession and/or rising interest rates.
The result: Huge portfolios of failing loans with rapidly falling collateral values.
Cause 2: Over-leverage of Risky Assets and Related De-regulation of Capital Requirements
I think the word "greed" was used about a zillion times last night in the Vice-Presidential debate. But what does it mean in this context? After all, we are all greedy in one way or another, if one equates greed with looking after one's self-interest.
So I will translate "greed" for you: When you hear "greed on Wall Street", think leverage. Remember, we said above that as long as the underlying asset values are going up, leverage (ie more debt) multiplies profitability. [Quick example: Assume a stock that goes from $100 to $110 in a year. Assume you pay 5% interest on money. No leverage, you make $10 on a $100 investment. With 95% leverage -- ie buying $2000 worth of the stock with $100 equity and $1900 debt -- you would make $105 on the same $100 equity investment. Leverage multiplied your returns by more than a factor of 10]
Remember that around the year 2000 we had the Internet bubble burst in a big way. A lot of companies not only dropped, but went to $0 in value. This was painful, but we did not have a cascading problem. Why? In part because most of the folks who invested in Internet companies did not do so in a highly leveraged way. The loss was the loss, time to move on. Similarly in this case, if these mortgage packages had been held as a piece of a un-leveraged portfolio, like a pension fund our an annuity, the loss would not have been fun to write off but it would not have cascaded as it has. The government would have had to bail out Fannie and Freddie, a few banks would have failed, but the disaster would have been limited.
One reason this problem has cascaded (leaving aside blame for Henry Paulson's almost criminal chicken-little proclamations of doom to the world) is that many of these mortgage packages or securities got stuck in to highly leveraged portfolios. The insurance contracts that brought down AIG were structured differently but in the end were also highly leveraged bets on the values of mortgage securities in that small changes in values could result in huge losses or gains for the contracts. (Some folks have pointed to actual securitization of the loans as a problem. I don't see that. Securitization is a fabulous tool. Without it, we would be seeing a ton more main street bank failures, as they would have had to keep many more of these on their books.)
If this all sounds a bit like cause #1 above, ie buying inflated assets with more and more debt, then you are right. There is an interesting parallel that no one wants to delve into between the incentives of home buyers trying to jump into hot housing markets with interest-only loans and Wall Street bankers putting risky securities into highly leveraged portfolios. Leverage is really the key theme here. In a sense, houses were double-leveraged, bought the first time around with smaller and smaller down payments, and then leveraged again as these mortgages were tossed into highly-leveraged portfolios. Sometimes they were leveraged even further via oddball derivatives and insurance contracts whose exact operation are still opaque to many.
Those who have read me for a while know that I am in the "let them die" camp. These Wall Street guys have been living high on the extra profits from this leverage in the good times. They knew perfectly well that leverage is a two-edged sword, and that it would magnify their losses in a bad time. But their hubris pushed them into doing crazy things for more profit, and I am all for a Greek-tragedy-like downfall for their hubris. The sub-prime, first-time home buyer can claim ignorance or unsophistication, but not these guys.
During the Bush Administration, these bankers came to the SEC trumpeting their own brilliance, and begged to be allowed to leverage themselves even more via a relaxation of capital requirement rules. And, in 2004, without too much discussion or scrutiny, the SEC gave them what they wanted:
Many events in Washington, on Wall Street and elsewhere around the country have led to what has been called the most serious financial crisis
since the 1930s. But decisions made at a brief meeting on April 28,
2004, explain why the problems could spin out of control. The agency’s
failure to follow through on those decisions also explains why
Washington regulators did not see what was coming.
bright spring afternoon, the five members of the Securities and
Exchange Commission met in a basement hearing room to consider an
urgent plea by the big investment banks.
They wanted an
exemption for their brokerage units from an old regulation that limited
the amount of debt they could take on. The exemption would unshackle
billions of dollars held in reserve as a cushion against losses on
their investments. Those funds could then flow up to the parent
company, enabling it to invest in the fast-growing but opaque world of
mortgage-backed securities; credit derivatives, a form of insurance for
bond holders; and other exotic instruments.
In part they traded capital requirements for computer models, a very dubious decision in the first place, made worse by the fact that most of the banks were gaming the models to reduce the apparent risk. The crazy thing is that, in gaming the models, they really weren't trying to fool regulators, who pretty much were not watching anyway, but they were fooling themselves! Certainly I would not expect government regulators to do a better job of risk assessment in this environment, which argues for a return to the old bright-line capital requirements that are fairly simple to monitor. Investment banks played a game of Russian Roulette, and eventually blew their own brains out. Which begs the question of whether the government's job is to protect consumers at large or to protect financial institutions from themselves.
“We foolishly believed that the firms had a strong culture of
self-preservation and responsibility and would have the discipline not
to be excessively borrowing,” said Professor James D. Cox, an expert on
securities law and accounting at Duke School of Law (and no
relationship to Christopher Cox).
The Dog that Didn't Bark: Ratings Agencies
Clearly, ratings agencies have really failed in their mission during this fiasco. Right up to the last minute, they were giving top ratings to highly risky securities. But I think folks who want to lay primary blame on the rating agencies go to far. Ratings agencies are for individuals and state pension funds and the like -- I have a hard time imagining Goldman or Lehman depending on them for risk assessment. Its a nice excuse, and we may well have very different companies rating securities five years form now, but its just a small contributor.
So you see what is going on. Republicans are running around saying "the government caused it with the CRA" and Democrats are saying "it was greed and deregulation." Incredibly, both parties seem to come to the conclusion that sickly mortgage securities need to be pulled out of the hands of the folks who created and bought them and put in ... my hands. I had smugly thought that I had avoided buying a home with zero-down at the peak of the market, but I was wrong. Via the federal government, I have bought a lot of them!
I personally would let the whole thing sort itself out, and live with the consequences. My hypothesis is that much of the current credit squeeze in the money markets is due to Henry Paulson's clumsy public statements and the Fed's busting open the door to overnight borrowing. Everyone is frozen not by the crisis, but by the prospect of some sort of government action. Short term borrowers and lenders are doing their business with the Fed, as the government crowds out the private short term markets and causes the very problem it is trying to prevent.
Without the government bending over backwards to take in short term money from lenders, private firms would be forced to find private options. Lenders have to lend to stay alive financially, just as much as borrowers have to borrow. Money may go into the mattresses for a week or two or three, but it can't stay there forever.
I do know that the fix is NOT.
Fixing these financial problems listed above does not include:
Sec. 101. Renewable energy credit.
Sec. 102. Production credit for electricity produced from marine renewables.
Sec. 103. Energy credit.
Sec. 104. Energy credit for small wind property.
Sec. 105. Energy credit for geothermal heat pump systems.
Sec. 106. Credit for residential energy efficient property.
Sec. 107. New clean renewable energy bonds.
Sec. 108. Credit for steel industry fuel.
Sec. 109. Special rule to implement FERC and State electric restructuring policy.
Sec. 111. Expansion and modification of advanced coal project investment credit.
Sec. 112. Expansion and modification of coal gasification investment credit.
Sec. 113. Temporary increase in coal excise tax; funding of Black Lung Disability
Sec. 114. Special rules for refund of the coal excise tax to certain coal producers
Sec. 115. Tax credit for carbon dioxide sequestration.
Sec. 116. Certain income and gains relating to industrial source carbon
dioxide treated as qualifying income for publicly traded partnerships.
Sec. 117. Carbon audit of the tax code. Sec. 111. Expansion and modification of advanced coal project investment credit. Sec. 113. Temporary increase in coal excise tax; funding of Black Lung Disability Trust Fund. Sec. 115. Tax credit for carbon dioxide sequestration. Sec. 205. Credit for new qualified plug-in electric drive motor vehicles. Sec. 405. Increase and extension of Oil Spill Liability Trust Fund tax.Sec. 306. Accelerated recovery period for depreciation of smart meters and
smart grid systems. Sec. 309. Extension of economic development credit for American Samoa. Sec. 317. Seven-year cost recovery period for motorsports racing track facility. Sec. 501. $8,500 income threshold used to calculate refundable portion of child tax credit.
And, of course, the big one:
Sec. 503 Exemption from excise tax for certain wooden arrows designed for use by children.
All of these, however, are part of the bailout bill approved by the Senate. Sources here and here.
Apparently Zimbabwe had an inflation rate of 14,000% last month, for a total of 531 billion percent inflation this year. If we assume for simplicity that inflation occurs only during working hours, if we spread if over 22 days a week, this means that ones pay at the end of the day is worth only 1/3 its value by lunch the next day, and 1/6 its value by the end of the next day. My understanding is that Zimbabwe companies pay their employees several times a day and let them go out at lunch and buy something, anything, tangible with the cash before it is worthless a few hours later.
By the way, I have my Zimbabwe 50 and 100 billion dollar notes on the wall of my office. I am hoping for a trillion dollar note to go with it. Meeses and Gippers coming soon.
A major shift to renewable energy and efficiency
is expected to produce 4.2 million new environmentally friendly "green"
jobs over the next three decades, according to a study commissioned by
the nation's mayors.
The study to be released Thursday by the U.S. Conference of Mayors,
says that about 750,000 people work today in what can be considered
green jobs from scientists and engineers researching alternative fuels
to makers of wind turbines and more energy-efficient products.
But that's less than one half of 1 percent of total employment. By
2038, another 4.2 million green jobs are expected to be added,
accounting for 10 percent of new job growth over the next 30 years,
according to the report by Global Insight, Inc.
Well, lets leave aside the measurement issue of making forecasts and establishing targets for metrics like "green jobs" that can be defined however the hell someone wants. For example, if they really were to define "green jobs" as they say above "makers of ... more energy-efficient products," then nearly everyone in industrial America already has a green job. Every car made today is more fuel-efficient than the equivalent car made 20 years ago, every motor more efficient, every machine more productive.
But lets discuss that word "incremental." Politicians NEVER, EVER cite job growth projections that are truly incremental. For example, tariff program X might be billed as saving 100 jobs in the steel industry, but what about the jobs lost in the steel-consuming industries due to higher costs? The same is most certainly true in this whole "green jobs" fiasco. It is the perfect political promise - impossible to define, impossible to measure, and therefore impossible to establish any accountability. Everyone who makes the promise knows in his/her heart the jobs are not truly incremental, while everyone who hears the promise wants to believe they are incremental. Politics thrives on this type of asymmetry.
I looked before at the impossibility of these numbers being incremental, but here is a second bite of the apple. The article says specifically:
The report, being presented at a mayor's conference in Miami, predicts
the biggest job gain will be from the increased use of alternative
transportation fuels, with 1.5 million additional jobs, followed by the
renewable power generating sector with 1.2 million new jobs.
That yields a total of 641,000. So is it really reasonable to think that these green plans will triple power generation employment? If so, then I hate to see what my electricity bill is going to look like.
The fuel sector is similar. There are about 338,000 people employed in petroleum extraction, refining, transportation and wholesale -- a number that includes many people related to other oil products that are not fuels. Add in about 100,000 for industry supplies and you get perhaps 450,000 jobs current tied to fuel production plus 840,000 jobs in fuel retailing (ie gas stations). How are we going to add 1.5 million net new jobs to a fuel production sector with 450,000** currently? And if we do, what is going to happen to prices and taxes? And if the investments push us away from liquid fuels to electricity, don't we have to count as a loss 840,000 retail sector jobs selling a product no longer needed?
** Your reaction may be that these job numbers look low. They are all from the BLS here. Here is a quick way to convince yourself there really are not that many people working in the US oil and gas industry: Despite years of mismanagement and government subsidies, politicians continue to fawn over auto companies. Despite years of excellence at what they do, politicians demonize oil companies. The reason has nothing to do with their relative performance, ethics, importance to the country, greed, etc. The difference is that the auto companies and their suppliers employ millions of voters. Oil companies employ but a few.
This is such ridiculous garbage as to be unbelieveable, but every paper in the country will print this credulously. Because if journalists were good with numbers, they wouldn't be journalists, they'd be doing something that pays better.
* Sec. 105. Energy credit for geothermal heat pump systems. * Sec. 111. Expansion and modification of advanced coal project investment credit. * Sec. 113. Temporary increase in coal excise tax; funding of Black Lung Disability Trust Fund. * Sec. 115. Tax credit for carbon dioxide sequestration. * Sec. 205. Credit for new qualified plug-in electric drive motor vehicles. * Sec. 405. Increase and extension of Oil Spill Liability Trust Fund tax. * Sec. 309. Extension of economic development credit for American Samoa. * Sec. 317. Seven-year cost recovery period for motorsports racing track facility. * Sec. 501. $8,500 income threshold used to calculate refundable portion of child tax credit. * Sec. 503 Exemption from excise tax for certain wooden arrows designed for use by children.
are also tax credits for solar and wind power, and a very expensive
requirement that health insurance companies cover mental health the
same way they cover physical health.
I went to see Santana with my son last Saturday night, and I can tell you that 67-year-old Carlos Santana is still the man on the guitar. 2-3/4 hours of straight guitar and percussion goodness.
But my new guitar fav's are probably Rodrigo y Gabriela, Mexican guitarists who went from street musicians to stars in Ireland. Here is Diablo Rojo
And while we are on guitarists, I can't help but give a shout out to fellow Princetonian Stanley Jordan, still the most amazing thing, technically, I have ever seen on guitar. If it looks like he is playing piano rather than the guitar, that's because his original training was on the piano. When playing piano, all one is doing is causing strings to get hit. He wondered why he couldn't just do it directly. Skip to about a minute in if you are impatient:
Or watch him playing two guitars at the same time in Stairway to Heaven around the 4:00 mark (Jimmy Page had his two-neck guitar but never played them at the same time!)
I wanted you to consider that in a recent previous post you had
mentioned that people are filling up their gas tanks before they
previously would, and they are filling up all their other cars, and
spare gas tanks because of the fear of not having enough necessary gas.
This is a market reality and is completely rational considering the way
the game's rules are set up (no gouging, as per the govt).
I would like you to consider that I, as a small business man,
maxed out all my lines of credit and deposited the money in my bank
accounts. If fear is driving this market, and if it causes banks to dry
up credit, I want to be the first to be tanked up on money,
so-to-speak. The negotiated rate of interest is not high enough for me
to be disinclined to borrow, at least until this credit storm blows
over. I know I am not the first person to have this idea and I won't be
the last, and we (together) will create the situation that you think
can't happen. The tighter credit gets, the more people will borrow, if
just to have the cash on hand, to not need to borrow in the future.
I have done the same thing. I am maxed on my line of credit, because the interest rate is low and I would rather have the money in hand and pay the interest rather than find out later my line is somehow revoked or frozen. The money is not needed for near term expenses, but I want to have resources in hand if the recession creates a business opportunity that requires funding. Does this worsen the near term crunch, the same way panic buying of gas worsens local gas shortages? Probably. And again, price is the key. Like with gas, I would rather rationing by price rather than shortage. In other words, I would rather my line of credit go up to a 15% interest rate, if that what it takes to put things in balance, than to be revoked entirely so a few businesses can still have 6% money.
I have never said that letting banks fail was without cost. I just think the cost is going to be there, one way or another, and the cheapest and quickest solution is to let the whole mess sort itself out.
By the way, the notion that small business lives on short term credit is a hoot. ExxonMobil may have access to the commercial paper market on short notice, but borrowing for our company, even in good times, generally takes a panzer division and a long war of attrition. Even layup deals have taken me 6 months or more to finance. Stephen Fairfax, via Mises, makes this point:
None of the small business owners I know depend upon easy credit to
make their payroll. When things get to the point where you need to
borrow to pay your employees, the end is near. Most small businesses
fail in the first few years, in large part because business is not
easy, it is hard. Not everyone is good at it. But it is an essential
part of free trade and the market economy that businesses fail, so that
new, better ones can arise in their place.
Few small businesses depend upon easy credit. Banks are generally
reluctant to lend to small businesses, with good reason. Most small
businesses are funded by owner's savings. Sometimes start-up money
comes from loans by parents or friends. While I can understand that
small businesses involved in building houses might profit from easy
credit, the market is sending unmistakable signals that there are too
many houses that are too expensive. Flooding the system with still more
easy credit can't be the cure, it is the problem.
So what does it take to overcome the opposition of Congressmen who said they opposed the bailout bill as too expensive, too big of a giveaway, and too much of a moral hazard? Why, more moral hazard (in the form of higher FDIC insured balances), increased spending, and, incredibly, money for alternative energy. Are these guys a joke or what? (HT Hit and Run)
By the way, I had a conversation yesterday with a very anti-Bush, anti-Iraq-War Democrat -- the sort that can't get through a five minute conversation without making a Dick Cheney crack. She was lamenting the failure of the bailout package in the House and excoriating Republicans for being so ignorant and narrow-minded. My response was:
I find it surprising that you take this administration on faith in its declaration of emergency in the financial sector. You've lamented for years about the "rush to war" and GWB's scare tactics that pushed, you felt, the nation into a war it should not be fighting, all over threats of WMD's that we could never find. You lamented Democrats like Hillary Clinton "falling for this" in Congress
But now the mantra is the same - rush, rush, hurry, hurry, fear, fear, emergency, emergency. Another GWB declared crisis in which the country needs to give the administration unlimited power without accountability and, of course, stacks of taxpayer dollars to spend. A decision that has to be made fast, without time for deliberation. Another $700 billion commitment. And here the Democrats go again. Jeez, these guys may have the majority in Congress but it is sure easy for GWB to push their buttons when he wants to. Heck, Pelosi is acting practically as the Republican Whip to get GWB's party in line.
This is Iraq without the body bags, and without the personal honor of brave soldiers in the trenches to give the crisis some kind of dignity.