Todd Zywicki Argues Against A Financial Products Safety Panel

Todd Zywicki thinks that the a Financial Products Safety Panel will lead to the demise of all the great financial innovations that we currently enjoy.

Here are a few excerpts from his column:

Virtually every credit product is valuable to some consumers. Low-documentation loans are a boon for homeowners with a lot of equity who want to refinance their mortgages (even as they are a dangerous thing to offer speculators)

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What he doesn't address here is the fact that the costs (systemic risk, foreclosure, personal bankruptcy, etc) incurred by low/no-doc loans may outweigh the benefit of allowing some people to refinance their mortgage in certain limited situations. Nor does he consider the fact that it might be possible to allow the loans in certain situations, but not in other. A regulatory agency might be useful for making these decisions. Maybe a consumer financial product safety commission?

He then goes on to talk about the evils of banning pre-payment penalties, as though this was the main contributor to the financial crisis. I do not believe it was.

European home values have also fallen. But foreclosure rates are lower in Europe partly because homeowners there haven't stripped their homes of equity to the same extent. Similarly, adjustable-rate mortgages are standard in Europe and have been very common at times in the United States. It was the Federal Reserve's erratic monetary policy that made adjustable-rate mortgages here "explode," not the loans themselves.

Also a problem was the fact that unregulated lenders actively sold loans to consumers who could not afford them, fueling a real estate bubble that was bound to burst. No doubt Zywicki would fault borrowers, and admonish them to act more rationally, which is a little like asking a dog to be more like a cat. Maybe a consumer financial product safety commission could help.

This obsession with simplicity threatens innovation as well as competition. Thirty years ago credit cards were exceedingly simple. They charged high annual fees just to own them (often $40-$50), high fixed interest rates (approaching 20%), and offered no cash rebates.

Today credit cards are more complex, but they are also better. They offer no annual fees for no-frills cards, flexible interest rates, and more benefits. Competition is fierce and consumers have a wide range of choices.

One wonders whether the credit card revolution would have been possible under a consumer financial product safety commission.

Here he is trying to argue that financial innovation in credit cards has been a good thing. We now have credit cards rules that are, frankly, impossible for the consumer to understand, exorbitant penalties, zero meaningful disclosure, and card companies that will try to talk 18 year olds with no jobs into going deeply into debt. The management doesn't care about future defaults, because they will have already collected their bonuses. But hey, we get airline miles and sometimes don't have to pay a fee!

Again, in order for people to make good choices, they need to have good information. Complexity obscures information. Here's a financial innovation: Require simple credit card rules, so that people can make an informed choice about their card without having to hire a lawyer. What entity might be able to do this? Maybe a consumer financial product safety commission?

Our current problems are caused by misaligned incentives and the rational response of consumers and lenders to those incentives. It's not a crisis of consumer protection. A new agency premised on the erroneous belief what consumers need is to be protected from themselves is likely to do more harm than good.

Rational response? I know that neo-classical economics (and its notion that people act rationally, carefully weighing the costs and benefits of each decision) is a hard habit to shake, but it's very difficult to argue that people have been acting rationally.

We want people to make better choices. In order to make better choices, they need better information. Hidden in the enormous information asymmetry between consumers and huge corporate lenders is a perfect opportunity for credit card companies to take consumers for all that they have. These companies have access to government and power that the consumer can not possibly imagine. They have hordes of lawyers and marketers, all of whom are fixated on making sure that they get as much money from borrowers as they can. In this environment, setting rules to address this disparity is a good thing.

Do you know what might really help in addressing it? Corporate tax breaks!


Just kidding. Actually, a consumer financial product safety commission would be a good start.

Remind Me Why Your House Should Be Worth More Tomorrow?

Over at Economist's View, Mark Thoma discusses the widespread belief that housing prices will rise long-term, versus evidence that shows that this may not be true. Since I think many people would dismiss this evidence, I'd like to take a quick look at why this might be the case.

I'd start by asking why we would assume that a class of assets would appreciate over time. In order for this to happen, we would need the supply of them to decrease, or demand to increase, or both.

It occurred to me that it might be helpful to list the reasons that home prices might increase, as well as the reasons that they might decrease. Feel free to add to the list in the comment section.

Reasons for price increases:

1. The supply of homes on the market decreases, resulting in competition among buyers and a bidding up of prices.

I can see no reason why this would result in a long-term increase in prices, as the market would presumably respond by increasing the supply until the prices return to an equilibrium. Unless

2. There is a limited supply of new homes.

While in certain localized areas (Jackson Hole, where I live, for example), there is a limited amount of land available for new homes, overall, there is no reason to believe that we are on the verge of running out of room in the foreseeable future. Of course, if people believe that we will run out of room, this could certainly impact prices. But I don't think that it would impact them in the long-term, as market corrections would tend to make people recognize the reality.

3. There is a demand for bigger and more expensive homes.

If the trend is to buy more expensive homes, then the average price of all homes will increase. This could result in long-term price increases, but only if it's sustainable- in other words, only if consumer preferences stay the same and income levels remain sufficient to pay for them. If every homeowner believes that they need to buy a 6000 square ft home with a pool, then prices will increase.

4. New regulations, commodity, or labor increases increase the cost of building a new home.

This is certainly possible, although it cuts both ways. Builders are getting more efficient at building, as well.

Here are some reasons prices could or should fall.

1. A home should depreciate in value.

A 30 year old home should not be worth more than a new one, if for no other reason than wear and tear. It should be worth less, unless there is a greater increase in value due to one of the reasons above. So we should start with this premise. Every day, your home should be worth less, and you need an increase in value due to demand or supply changes just to keep up.

2. Homes become less expensive to build.

If builders become more efficient at building homes, and labor, material, and regulatory costs decrease or stay the same, homes could easily become less expensive to build. So the house that cost $300,000 to build 2 years ago now only cost $200,000. This could result in sustainable downward pressure on prices. As someone who has personally helped build a house, I can attest to that fact that technological advances are making home-building less costly.

If you think this is not possible, look at the recent prices decreases in computers, for example, or HDTV's. Increases in efficiency will be long-term. How much do you think that state of the art desktop you bought 5 years ago is worth today, even if it's never been used?

3. There could simply be a long-term trend away from preferences for expensive homes.

I think that this is not only possible, but likely. While we may not see large-scale use of these anytime soon, it's very likely that consumers will start to see the folly in wasting money on homes that are mostly for show and inconvenient and costly to live in. If this happens, then the prices on these large homes will continue to drop. The impact of changing attitudes towards environmental issues could devastate the market for large homes.

4. Demand could drop overall. There is no reason that population increases, which drive demand, will increase forever. Population growth rates are already negative in many European countries, and this is a trend that could easily affect us as well.

Taken together, it looks at first glance as though there are plenty of reasons for short-term gains in housing prices, but even more reasons for long-term decreases.

I think we need to stop looking at homes as investments. They generally do not produce marginal wealth. You can invest in a building that will be used as a factory, for example. But you purchase a home. Fundamentally, it's no different than buying a car or a computer or a boat, except that you pay for it over a much longer period of time. During bubbles, people have a tendency to look at these sorts of assets as investments. But they really are not. And this is a critical point that many people fail to see.

Having said all that, I think I should put my money where my mouth is and get my house listed.

Preventing Bubbles

Baseline Scenario touches on the Fed's newfound desire to manage asset bubbles here.

I'm a little bit skeptical of the Fed's ability to do this. They didn't seem to learn much from the dotcom and real estate bubbles.

There will always be bubbles, in the sense that, in the universe of capital allocation, there will always be some segment that is less efficient.

In other words, there will either be perfect equilibrium, or a bubble(s). So the idea that we can eliminate or prevent all bubbles is illusory.

Given that, the question before us should be how to minimize bubbles, and how to isolate their impact.

As always, I think we need to start with reducing leverage and complexity. Complexity feeds bubbles by obscuring their existence through a reduction in market information. Leverage is the mechanism by which they metastasize.

Focussing on these two problems would be a good place to start.

The Washington Post Doesn't Get it

From an NYT update on the Washington Post scandal I wrote about:

The publisher of The Washington Post apologized to the paper’s readers on Sunday after a controversy erupted over the company’s plans to organize sponsored meetings that would include Washington lobbyists, government officials and the paper’s own journalists.

The Post canceled the first of what it billed as exclusive “salons” at the home of the publisher, Katharine Weymouth, after critics accused the paper of seeking to profit from its access to members of Congress and administration officials.

Ms. Weymouth, in a letter to readers that appeared on the opinion page Sunday, wrote that “firm parameters” had not been followed in planning the events. These included having reporters and editors participate as moderators and not setting any limits on what questions they can ask.

“Our mistake was to suggest that we would hold and participate in an off-the-record dinner with journalists and power-brokers paid for by a sponsor,” she wrote.

No, Katharine, you didn't err by suggesting that you might do these things, as though you were planning something innocent and people got the wrong idea. You intentionally and consciously planned to sell access to your reporters- reporters who are supposed to be independent and adversarial. You got caught. Your newspaper is so much a part of the Washington political scene that you probably didn't even realize how obviously wrong this is, but that is not an excuse- that's a symptom of the problem. And to drive home that point,

She added that if The Post were to hold any such event, “everything would be at arm’s length — sponsors would have no control over the content of the discussions, and no special access to our journalists.”

"Arm's length?" What does that even mean?

"No special access to our journalists?" They should not be offering access to their journalists at all. Period.

So we are supposed to believe that lobbyist will pay tens of thousands of dollars to meet reporters, but, after cocktails and a long conversation by the pool about health care reform and defense contracting, these reporters will erase all memories of personal contact and go out and write stories about these people and what they do without being affected at all?

And keep in mind that this is giving them the benefit of the doubt, which they've clearly not earned. I can't think of any reason why we shouldn't assumer that The Post has made a deal whereby these lobbyists are promised favorable stories in return for cash.

Because that sure is what this looks like.

Why The Fourth of July Bothers Me

July 4th has recently begun to bother me.

This isn't because I have a problem with a holiday that commemorates the founding of a country that has undeniably risen to a level of unprecedented prominence and power. Nor is it because it celebrates that founding as a good thing, which I believe it was.

No, the thing that's beginning to bother me is the mindless patriotic rhetoric which invariably accompanies the holiday, and the apparently complete lack of introspection, by huge segments of the population, on who, exactly, we Americans are today.

The Fourth of July is the day that we boldly proclaim our superiority to the world. "America stands for freedom!", we are told. "America is great!" We are told that we are the most free, most just, most peaceful, most equitable, most moral, richest and smartest people on the planet. Our soldiers are all heroes, and those we oppose are all terrorists. We are divinely endowed with these attributes, and charged with forcing them on the rest of the world. We believe that we are truly exceptional.

On this last point, at least, we may be correct. We are exceptional in our extremes and in our superlatives. But they aren't the ones we usually think of.

We are exceptional for imprisoning more people and at a greater rate than any other country on earth.

We are exceptional for having the largest war-making capacity in the history of mankind.

We are exceptional for our belief that the unprovoked killing of hundreds of thousands of Iraqis in their own country can be justified.

We are exceptional in our belief that it's not torture when we do it.

We are exceptional in the disparity of our wealth, and in the amount of power and wealth that we vest in an oligarchic and plutocratic elite.

We are exceptional in our position as a wealthy, industrialized nation that does not provide its citizens' health care.

We are exceptional, quite frankly, in our lack of humility. But pride, as they say, goeth before the fall.

In short, we really aren't that great any more. We've all been trained since birth, (in a way that's fundamentally not that different from how it's done in North Korea), to revere the United States, to idolize and accept it without question. But now is the time to question that- to fundamentally examine everything that we've been taught and have believed without the slightest bit of skepticism.

Ultimately, the greatness of a country is derived from the actions of its people. And if we are to become a great country, we will need to honestly and humbly examine our actions, and objectively compare them to our professed national system of beliefs. And then take action to realign the two.

I think it is the humility that will be the hardest to come by. But without the humility to admit our flaws, we will never correct them.

And maybe it's because humility seems to be in the shortest supply at this time of year that the Fourth bothers me so much.

The Marketing Firm of Washington, Post and Weymouth

The Washington Post has been forced to cancel an event amid widespread criticism. Politico.com has the full story here; and below are some highlights:

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Washington Post publisher Katharine Weymouth said today she was canceling plans for an exclusive "salon" at her home where for as much as $250,000, the Post offered lobbyists and association executives off-the-record access to "those powerful few" — Obama administration officials, members of Congress, and even the paper’s own reporters and editors.

The astonishing offer was detailed in a flier circulated Wednesday to a health care lobbyist, who provided it to a reporter because the lobbyist said he felt it was a conflict for the paper to charge for access to, as the flier says, its “health care reporting and editorial staff.".......

Weymouth said the paper had planned a series of dinners with participation from the newsroom “but with parameters such that we did not in any way compromise our integrity. Sponsorship of events, like advertising in the newspaper, must be at arm's length and cannot imply control over the content or access to our journalists. At this juncture, we will not be holding the planned July dinner and we will not hold salon dinners involving the newsroom. “

"Underwriting Opportunity: An evening with the right people can alter the debate," says the one-page flier. "Underwrite and participate in this intimate and exclusive Washington Post Salon, an off-the-record dinner and discussion at the home of CEO and Publisher Katharine Weymouth. ... Bring your organization’s CEO or executive director literally to the table. Interact with key Obama administration and congressional leaders."

****************

Just to make this clear, what the Washington Post was trying to do here was to hold an event where lobbyists would pay large sums of money to be allowed to attend a party where they could talk to reporters and editors of the paper.

In other words, reporters and editors, who are supposed to report objectively on and remain independent of the people whom they are covering, are accepting money from those people instead, and when caught, are claiming that they would not have allowed this to affect their reporting!

I'm sure this would have been news to the health insurance industry lobbyists who were supposed to pony up a quarter of a million dollars apiece for the chance to convince a Post reporter that the health of their customers is their number one priority, and that a public option will result in us all dying.

I honestly do not know how anyone could trust anything published by the Post at this point. They obviously have no integrity. They were literally planning to act as a marketing firm. I think Dan Froomkin might have quit at this point anyway.

Brian Williams and the White House Pajama Party

Dan Froomkin weighs in on NBC News at Watchdog Blog:

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"What would you do if you — and your 32 camera crews — were granted unparalleled access to the White House for a day? And then you had two full hours of prime-time TV to fill?

There are many mysteries you might try to explore. How does President Obama actually make decisions? What if anything changes his mind? What blows his cool? How does he settle disputes among his advisers? Who is the last one to whisper in his ear? How does he treat his staff? How furious is the competition for his attention? Who wins? Why is he so sure, so confident, that thinking big is the solution to every problem? How do he and his staff really feel about the mess Bush left them? How does the former constitutional law professor reconcile his devotion to civil liberties with a handful of recent decisions that have horrified civil libertarians? Does he have second thoughts?

But sadly those were not the sorts of things that seemed to interest anchor Brian Williams and the more than two dozen NBC News producers responsible for the “Inside the Obama White House” special showing last night and tonight, a show that treats Obama like a celebrity rather than a president.

Part of the problem, most assuredly, was that the White House had the ultimate say in what the cameras were allowed to record, and what they weren’t. As Williams says at the show’s outset: “Our job is to show as much as we can of the inner workings, especially of the West Wing. The job of the White House is to show us what they want us to see.”

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My response to Williams' idea of what his job entails is: No, no, and no! That is not your job! Your job is absolutely NOT to simply waste your time being spoon-fed tripe by the White House. You are supposed to be in an adversarial role as a high-ranking member of the press. Why are you wasting your time filming the president eating M&M's and ordering burgers? Is this really the best way that you could spend your time day?

Furthermore, your job is to find out the things that the White House DOES NOT want to show us. The White House does not need help with publicity, and if they did, then they should hire a PR firm.

Nor do I buy the argument that this is all that they would show him. This was a plum tossed Williams' way. This was the White House saying, "Let's be friends." And the problem with journalists today is that they all want to be friends with the people in power. And who wouldn't want to go to the White House for a once-in-a-lifetime opportunity? But if you have chosen a profession where you are supposed to be in an adversarial relationship with government, then you simply cannot do this.

If the White House wants to put together a video montage, showing how they would prefer to be perceived by the public, then let them do so. Let them post it on YouTube. Let them show you how much they all like candy and cuddly dogs. But do not put your seal of journalistic approval on it by producing it and slapping an NBC News logo on it.

If this was designed as test of Brian Williams' journalistic integrity, then his grade is no less than EPIC FAIL. And "journalists" wonder why the mainstream media is held in such low esteem.

Incidentally, Dan Froomkin is one of the few reporters who still takes his job seriously. He truly does consider himself as part of the adversarial press. Of course, although being one of the most popular of all the Washington Post writers, he was just fired by them for not toeing the company line, which, at the Post, means repeating whatever the current administration says without question.

Maybe Brian Williams can take Froomkin's job. He seems to be quite good at that.

Ex-Governor Palin, You are no President Nixon!

As you've probably heard, Sarah Palin is stepping down as governor of Alaska. She is reportedly doing this so she can focus on a presidential run in 2012.

What exactly is it that makes her think she is qualified to run for president?

This is not a rhetorical question. A CNN/Opinion Research poll in February showed that 29 percent of Republicans would support her as the nominee, which put her in first place among them.

What this means is that a large number of Republicans believe that the correct ideology can overcome just about any lack of experience or talent. They believe that Sarah Palin's belief system is so correct and perfect, that she can use it to make the right decisions on any matter, regardless of her knowledge of the subject at hand. In other words, she has a unified theory of the world which will direct her in any situation. Of course, any Republican could do this, but she has the advantage of being more personable and better looking than Gingrich or Cheney.

Need to know what do if Israel bombs Iran? Refer to the conservative manifesto. Or maybe the neo-conservative one. (I'm assuming she'll settle on one before the Iowa caucuses.)

What's the correct response to a global market crisis caused by unregulated derivative trading? Let's see. That's on page 3 of the 4-page Republican guide to running the universe. Page three is entitled "Economics." The only words on the page are "Free Market!" Never mind that she doesn't know what derivatives are. That's why we have a simplified guide to the world right here in our ideology! Free the markets!

How should we approach the absolute disaster that is the current war on drugs? Easy! Drugs are illegal. Therefore they are wrong. Why are they wrong? Because they are illegal! When people do illegal things, they are criminals. Criminals are a threat to freedom loving people everywhere. We have to put them all in jail!

For this subset of American voters, experience, wisdom and judgement are negatives. The world is simple; therefore nuance, and the ability to think for yourself is redundant, and, in fact dangerous. You might get it wrong. From this perspective, it was important that she resign immediately before getting tainted by too much experience for the job they want her to have.

If you think this is an unfair caricature, you haven't been paying much attention to the Republican Party lately.

Creating Terrorists

There has been quite a lot of discourse on the topic of Obama's continuation of Bush's policies in regards to political prisoners at Guantanamo Bay, and so I thought I'd write a few words about it.

There has been a huge public outcry over the potential closing of Guantanamo. Right-wingers have been up in arms over the possibility of a few detainees (note: they are not necessarily terrorists) being transferred to supermax prisons, or, even worse, being given a fair trial.

What are we afraid of?

If we're afraid that they will escape, then we're being irrational. This is not going to happen.

But it could be something else. And I believe it's the fear that they will be given a trial, and they will be found not guilty, and that they will then be released.

There is a legitimate concern here. These detainees have been tortured so badly that their confessions are inadmissible in a court of law, and in all likelihood, even if some of them are guilty of something, they cannot be convicted in a fair trial.

My response is: so what? Then let them go.

As a matter of principle, most of them should be released right now. If they are threats to us, then so be it. We brought this upon ourselves. And if we truly believe in freedom and the rule of law, then we will have to accept the consequences.

But as a practical matter, we should also release most of them now, and try the rest immediately. The fact that this unjust system exists is one of the greatest terrorist recruiting tools Al Qaeda has. The danger that the detainees represent to us is dwarfed by the opportunities for radicalization that they represent around the world.

There is one other thing that bothers me. I believe that the unspoken fear people have is that we've taken innocent people, tortured them so badly that they now hate America more than anything on earth, and will do anything in their power to harm it. And so we would rather just write them off as casualties- as more unfortunate collateral damage in an already unjust war.

I hope that we can confront this fear and overcome it. For it is enabling us to act as a country without a conscience. It is a great tragedy, and a shame on our nation, that we've allowed this to happen. That, in the face of undeniable evidence that we were wrong, we continue to perpetuate this crime.

President Obama was elected by people who believed that this policy was morally wrong. He has apparently turned his back on his beliefs. Let's not let him forget that.

Gullible's Travails

I was recently forwarded this by a friend who wanted to know what I thought of it. It's sort of a primer on libertarianism. I ended up giving it the FJM treatment, and it took me a couple hours, so I figured I'd post it here. Bold face is, of course, the original text.




The Philosophy of Liberty is based principle of self-ownership.

As an former philosophy major, among many majors that I failed to follow through on, I'm interested.

You own your life.

Fair enough, although I'm not sure if I have a free and clear title on it. Or what this means, really.

To deny this is to imply that another person has a higher claim on your life than you do.

As a moral argument, I'll buy this. But I think we're going to run into problems with reality here.

No other person, or groups of persons, owns your life.

I guess what makes me a little skeptical of this argument is that I don't know what it means to own your life. Does it mean you can do whatever you want with it? Are there restrictions? If so, who decides what those restrictions are? Maybe I'm getting a little ahead of myself. I just think the word "own" is a little strange here. Also lacking is a definition of life. Does he mean life as in physically living? Because if I own that, I'm more of a silent partner. There are plenty of other things in the known universe that can terminate it without my consent.

Maybe he means that I can do with it what I want as long as I'm alive. But this would imply that I could decide to have no restrictions on what to do with it.

Nor do I own the lives of others.

No, but I can do things that affect the lives of others, or, conversely, I can not do things that will affect the lives of others.

You exist in time: Past, Present and Future....This is manifest in Past, Present and Future...To lose your life is to lose your future.

Some people would say that you only exist now. But I am hoping that this is a rather meaningless yet catchy way of saying nothing; if this philosophy is based on theories of existentialism, then it's foundation will be rather shaky.

To lose your liberty is to lose your present.

As a statement of fact, this is undeniably false. I personally prefer to be free, but there are some quarter million people incarcerated in the state of Texas alone who have a present, although it's not necessarily the one they always dreamed about. But I happen to think there are worse things than to be unfree, depending on your point of view. If you're alternatives are death, or say, living free but with a horrible disease and no insurance or way to pay for treatment, then, realistically, you may reconsider your desire for liberty. And in any case, while liberty is generally preferable, all things being equal, the problem is that all things are generally not equal. And you certainly will not "lose your present."

And to lose the product of your life and liberty is to lose that portion of your life that produced it.

I don't really know what to make of this. If someone takes away everything I own, it will be as though I never existed? I don't want anyone to rob me, but this is making a little too much of the things I own. The things in my past that are valuable are my memories, my experiences, my relationships with other people. These aren't going to disappear simply because my property is taken. And I have to assume he means property here, as given the context I don't know what else he could mean.

A product of your life and liberty is your property.

The use of the indefinite article now seems to imply that there are other products of your life and liberty.

Property is the fruit of your labor, the product of your time, energy, and talents.

That is one type of property. But not all property is the fruit your labor, and your labor only, as this implies.

Inherited property is generally the fruit of someone else's labor. And in fact, most property could not be produced without the help of society. Sure, you may put in time, energy, and talent, but don't kid yourself into believing that, without the help of others, including the hundreds of years of western civilization, its institutions, its triumphs and its crimes against humanity, you would be able to invent, say, Windows.

Property is that part of nature which you turn to valuable use.

This would seem to leave out intellectual property and inherited property.

Property is the property of others that is given to you by voluntary exchange and mutual consent. Two people who exchange property voluntarily are both better off or they wouldn't do it.

I suppose this makes sense in an idealized economic environment. The problem is that those never exist. This is one of those theories that underpin free-market ideology, and that try to neatly describe the world, and have to simplify things and ignore reality to make the theory work.

This becomes clear when you consider that people exchange property constantly and often end up worse off. There are millions of people who exchanged cash property for over-priced real estate just in the last few years, and for many of those transactions, there was a clear winner and a clear loser.

The theory here is that voluntary trade is always good, when the reality is that it is sometimes good and sometimes bad. The biggest reason for people making trades that are not in their best interest is because of the problem of information asymmetry, which simply means that one party knows more than the other. This is a real issue, and it's one that doesn't fit into radical free-market economics, and so it's often ignored.

Only they may rightfully make that decision for themselves.

I would agree with this, in those cases where both parties have all the information. But those cases almost never exist. The question then becomes whether society has a responsibility to intervene, in cases where people can cause themselves harm in inequitable exchanges.

The libertarian ideological response is always no. But let me pose an example. Suppose your grandfather dies, and your grandmother is left with a life insurance benefit of $300,000 to see her through the rest of her life. She goes down to her local financial advisor, and he recommends that she invest it all in, say, Pets.com at the height of their stock price in February 2000. He thinks it's going to be the next big thing. She buys 27,273 shares at $11 a pop, and on her advisor's advice, continues to hold them as they rapidly decline later that year, finally selling all of her shares in November of that same year (just before the company announced it was liquidating) for $0.19 per share. Which leaves her with a mere $5181.82 for her retirement.

Now, there is no force or fraud here. There is only a lack of information. In fact, we can posit that the advisor was being truthful and honest in everything he said.

I'll repeat the previous statement, as it's one that is integral to free-market economics. Two people who exchange property voluntarily are both better off or they wouldn't do it.

It seems that sometimes, people may wrongfully make those decisions too. True free-market economics require you to say, "Tough luck. It can't be helped." Ignoring the fact that, yes, this actually can be helped. And it requires perfect information and rational behavior. These are two things that markets in the real word are notable for lacking.

At times some people use force and fraud to take from others without voluntary consent. The initiation of force or fraud to take life is murder. To take liberty is slavery. To take property is theft. It is the same whether these actions are done by one person alone, by the many acting against the few, or even by officials with fine hats.

I will agree with this as a general description of murder, slavery and theft. I'm not sure why we need to talk about people with fine hats.

You have the right to protect your own life, liberty, and justly acquired property from the forceful aggression of others, and you may ask others to help defend you. But you do not have the right to initiate force against the life, liberty and property of others.

Fine. With limitations, which I'm sure we'll get to.

Thus you have no right to designate someone to initiate force against others on your behalf.

I can see where this is leading.

You have the right to seek leaders for yourself but you have no right to impose rulers onto others.

Oh, boy.

First, note the rhetorical sleight of hand here. They're leaders when they are for you, but rulers when they are for someone else.

But really, this is just nonsense. Are we each to have our own leader? Is this possible? Has there ever been a civilization in the entire history of the human race where some people did not want the leaders that they have? What system is he proposing?

The best system ever devised is democracy, and democracies can really only work best in a relatively small number of current societies, and even then, nearly half of the citizenry is unhappy with the leader of the government, and almost everyone is unhappy with someone that represents them.

So basically, democracy is the imposition of rules on the minority by the majority. This does, in fact, make me a little uncomfortable. But the alternatives truly frighten me. Including what seems to be promoted here: anarchy.

Here, again, we have a total disregard for reality because it doesn't fit in with the ideology at hand.

No matter how officials are selected, they are only human beings and they have no rights or claims that are higher than those of any other human beings. Regardless of the imaginative labels for their behavior, or the numbers of people encouraging them, officials have no right to murder, to enslave, or to steal. You cannot give them any rights which you do not have yourself.

In fact, the historical definition of rights precludes them from being given at all, as they are granted at birth. But I won't argue with this.

Since you own your life, you are responsible for your life.

Again, I don't know what this means. Does it mean that I'm responsible for my actions? Sure.
But really, unless a better explanation of what "own your life" means is forthcoming, I'm guessing that any argument which rests on this premise is going to be on pretty shaky ground.

Come to think of it, reread that statement. Since you own your life, you are responsible for your life. Does this mean anything at all?

The more I read it, the more i think it's just feel-good tripe that people read, accept, and then unconsciously rely upon in some specious argument. In fact, I reject that premise as meaningless.

You do not rent your life from others who demand your obedience.

Is that even possible? If not, what business does it have in a philosophy of liberty?

Nor are you a slave to others who demand your sacrifice.

This is true. I am not. But the reality is that people are enslaved all the time. And no one is truly free. We all depend on the whim of others, even if only to the smallest degree.

You choose your own goals based on your own values. Success and failure are both the necessary incentives to learn and to grow. Your action on behalf of others or their action on behalf of your is virtuous only when it is derived from voluntary, mutual consent, for virtue can exist only where there is free choice.

Definitions of virtue have abounded since Socratic time, and here is yet another. Virtue is voluntary, mutual consent. And it cannot exist without it.

I suppose that is one definition. I do not think that it is an exhaustive one, however. Nor is it sufficient. Again: voluntary, mutual consent is generally good. But it depends on the situation. And it's not the only thing. Justice, truth, beauty, happiness, wisdom, symmetry....these have all been claimed by people as virtue, and they have just as much right to lay claim to it as anyone.

This is the basis of a truly free society. It is not only the most practical and humanitarian foundation for human action; it is also the most ethical.

The funny thing is that I used to be a libertarian because I wanted to live in this society, which was easy to understand (you can explain its working in 8 minutes) and everyone seemed to get along well and make good decisions. I couldn't understand why it didn't exist. And then I realized that many people have different views of what's ethical, and that many people had different priorities than me. Plus, this utopia requires rationality from people and from markets, and in case this is not yet clear -given the recent financial turmoil- people and markets are categorically not rational.

If people behaved as free-market economists want them to, and as libertarian ideologues wish they would, then this would be a fantastic place to live. I'll be the first one in line. Until then, I'm going to continue living on earth, with all of its irrationality, injustice, and intractable problems that seem easy to solve until you look a little more closely.

Problems in the world that arise from the initiation of force by government have a solution. The solution is for the people of the earth to stop asking government officials to initiate force on their behalf.

Seriously? This is a solution? Thank you! Why has no one thought of this before? And the solution to murder is to stop killing people. The solution to the problem of ugliness is to stop being ugly.

Oh, well. At least these are pleasant fantasies.

Also. note the anti-government bias here. It's always good people who have a bad government which starts wars.

Evil does not arise only from evil people, but also from good people who tolerate the initiation of force as a means to their own ends. In this manner, good people have empowered evil people throughout history.

So sometimes bad people do bad things. And sometimes good people do bad things. So what makes bad people bad, then?

Having confidence in a free society is to focus on the process of discovery in the marketplace of values, rather than to focus on some imposed vision or goal.

What if the imposed vision or goal is one of freedom and choice, and the ability to choose a leader for yourself? What if the marketplace for values includes values such as ensuring that all Americans have health care?

Using governmental force to impose a vision on others is intellectual sloth...

Wait? Why is this lazy? It's not lazy. It may or may not be desirable (depending on the context), but it's not lazy. Lazy is categorically labeling diverse types of actions so as to fit them into an ideological framework.

...and typically results in unintended, perverse consequences.

Every action results in unintended consequences. Sometimes they are perverse, sometimes they are not. But here's the kicker: every inaction does too. In fact, we just don't know the future. And making decisions on whether or not to do things is hard. So is figuring out how to do them correctly. It's so hard, in fact that some people have come up with philosophies of inaction, so that they can just not do anything at all, because something bad might happen.

Achieving a free society requires courage to think, to talk, and to act.

I do want a free society. And so I'm doing these things. But I don't want one at any cost.

Especially when it's easier to do nothing.

Fair enough.


Look, I'm what I guess you could call a cultural libertarian. I don't want government to enforce its morals on me. But that is only one of the two sides to modern libertarianism. The other side is a free-market radicalism that is completely detached from reality. It has constructed elaborate theories of how people should act, and ignored how they actually do. It has, through the Chicago school of economics, dared to predict the workings of a market, and it should have been discredited once and for all when Myron Scholes' and Robert Merton's theories on rational markets disintegrated in the irrationality of Long Term Capital Management's implosion in 1998.

Free-market radicals are always full of excuses about why their theories fail. They complain that someone did something irrational, or that external forces interfered, or that politics got in the way. It's as though people have up until then behaved rationally, or external forces had not existed prior to then, or that politicians behaving like politicians was something that just shouldn't happen. They play with their perfectly constructed models, in which everything is insulated and predictable, and then are surprised and indignant when a toddler walks by and smashes it. They say the toddler could not have been predicted, yet they do not see the irony of a completely predictive theory being ruined by something unpredictable.

I believe that markets should be generally free. But it's a giant leap to go from generally to always. The devil, as always, is in the details.

Origin of a Crisis

Last week Mark Thoma argued that the "shadow banking system" was primarily responsible for last fall's financial crisis. A blogger at The Atlantic tried to refute that claim, arguing that the crisis was started at institutions which were heavily regulated.

It seems that they’re both right, in a sense. Many of the big problems came from institutions that were regulated in the traditional markets in which they operated, but were not regulated while conducting off-balance-sheet trades. CDS trades, for example, were not subject to traditional capital requirement regulations, and many regulated banks were heavily engaged in these. So the ability of regulated banks to engage in activities which were not regulated was a huge problem.

Obviously, something should be done about derivatives, particularly the CDS’s. You can regulate traditional banking operations all you want, but if you are ignoring the potential for massive liquidity risk in unregulated trading, then you’re wasting your time, or, worse, creating a sense of false security.

But what can be done about derivatives? I do not believe that they can be made safe through regulatory oversight; they are simply too complex for regulators to properly value. And because of correlation issues, market participants are even less able to quantify liquidity risk because they do not have access to information regarding the overall positions of their counter-parties. (Presumably, the regulatory agency would have this information, but that is a big presumption.)

So, if they are not safe now, and they cannot be safely overseen, I think the answer is to ban them.

Update on Iran

From the theledes.blog .....

Update | 3:52 p.m. Iran’s Press TV reports that the country’s Supreme Leader has blamed enemies of the state for the violence on Monday, and claimed that it was unrelated to the announced results of last Friday’s presidential election:

“Some people are against the unity of the Iranian nation and the solidarity of the Islamic system,” Ayatollah Seyyed Ali Khamenei said in a meeting with representatives from the four candidates in Iran’s presidential election and officials from the Guardian Council and the Interior Ministry.

“Such acts and vandalism and some crimes that were committed are not related to the candidates’ supporters but to disturbers of peace and all should stand against them,” the Leader said.

Ayatollah Khamenei said all candidates are backing the principles of the Islamic Republic and support peace in the country and the election should not cause divisions.

The Leader called on all political figures to take a clear position against the post-election violence and urged the Iranian nation to withstand those committing crimes in the streets.

“If the election result had been other than this, such incidents would have occurred nonetheless,” he said.


It looks as though Khamenei is trying to convince Iranians that the confrontations had nothing to do with the elections. He's trying to keep the opposition from gaining confidence. It also looks as though he is completely out of touch with reality; the more people realize this, the more emboldened they will become. This is shaping up to be a momentous, if not revolutionary, event.

Drug War Failure

Finally, someone over at the NYT has had the courage to call the War on Drugs a failure. It's a blot on their record that they took so long to do so, but at least they are saying something now. The United States has actively ruined millions of lives, wasted billions of dollars that it doesn't have, imprisoned its own citizens at the highest rate in the world, supported terrorism, encouraged the use of unregulated, dangerous street drugs, exported violence to other countries, created a dangerous black market here at home, and restricted the basic freedoms of its citizens in an unjust and arbitrary fashion. And in 40 years of doing all this, it has not made any significant improvements in the rates of drug use in this country.

At this point, the people who most strongly support the War on Drugs are hard-core conservatives who, really, resemble the mullahs in Iran more than the founding fathers, and those who have a vested, financial interest in its continuance; i.e, police unions, prison guard unions, and beer, wine and liquor distributors.

The rest of the country, and indeed the world, is beginning to see the reality. Drugs are not going away. If there is one thing the last 40 years has shown us, it is that they are here to stay. Given that fact, will can:

A. Waste untold billions of dollars and inflict massive harm on people around the world on a war that we clearly cannot win, or,

B. Accept reality and find ways to mitigate the admittedly harmful effects of some drugs, through education and voluntary treatment.

We will look back at this period in 20 years and ask ourselves how could we be so backwards as to imprison people with drug habits. And to those who say, "But it's against the law!", I would reply that it's time for you to think for yourself. If a law is unjust, than work to change it.

In fact, I am advocating jury nullification for all non-violent drug charges, period. If you find yourself on a jury, vote to acquit, no matter how strong the evidence. This is one of the few ways we have left to fight the system. And most importantly, stand up and say what you believe. Don't be ashamed.

I will say right now that I have used illegal drugs. And instead of being ashamed of that, I am ashamed of our country and citizens for abusing my rights and my freedoms.

Buying things from yourself

There is a story today in the Wall Street Journal about banks which want to buy assets from themselves through the PPiP program. PPiP was put in place to help buyers of toxic assets, basically because if no one bought them, the banks that held them would be insolvent. But no one was buying them, and the banks needed to get rid of them quickly, and so PPiP uses taxpayer money to make a crappy asset seem less crappy to potential investors. Now, however, the banks who own these crappy investments want to use taxpayer money to buy them so they they themselves can profit from the very program that was intended to keep them solvent. And the only way they can do this is by selling the assets to themselves!

Sound like a scam? It's not, because scams are things that small-time con artists do, and these guys are in a different league. This is a massive transfer of wealth from taxpayers to shareholders. And the bankers who are engineering it will get a cut. They always do.

I think this is one of those issues where the Obama administration needs to speak out. Obviously, they need to make it very clear that this is unacceptable.

But Obama should do more than that. He should use the presidency as a bully pulpit here. We have been asked to understand his reluctance to make the banks suffer, or to speak out strongly against them, because those kinds of words or actions might harm a bank that was on the brink of insolvency.

This, however, is a perfect opportunity for the president to speak out against banking executives and to shame them in front of the taxpayers. The crisis has passed, as the administration says. It's obvious to investors that no big bank will be allowed to fail.

But if the administration wants to enact any kind of meaningful legislation regarding the industry, it will need public support. And the industry is making it easy for them.

Here's what I would like to hear from the mouth of the president himself:

"You may have heard stories in the media about banks trying to profit from the program that we set in place with taxpayer money to ensure that these banks did not fail. These stories are true. We bailed out these banks, not because we agreed with what they did, but because we felt we had no choice. In fact, we believe that many of these bank were financially irresponsible. However, because we allowed them to become too big to fail, we had to hold our noses and help them out.

"Today, however, these same banks are trying to profit from this program by using a loophole to buy investments from themselves, using taxpayer money as a guarantee in case these investments go bad. This means that if their investment does well, they make money. If it does poorly, you, the taxpayer, will pay for it.

"I am telling you this because I want to assure you that I will not allow this kind of behavior to continue, and that I will do all in my power to ensure that these banks never again have the kind of influence that they have today."

I'm very disappointed in the fact that the administration has not spoken out more strongly. This is a perfect opportunity for them to do so.

McCain-Feingold vs Us

The Supreme Court is currently reviewing yet another appeal of the McCain-Feingold Bipartisan Campaign Reform Act, which is a law passed in 2002 that limits the way money can be spent on political advocacy. The case in question involves a movie made by an admittedly partisan group, Citizens United, which runs 90 minutes or so and is decidedly anti-Clinton. In fact, by all accounts, (I have not seen it), it is not much more than a 90 minute campaign ad masquerading as a movie. And the problem with that is that the Federal Election Commission (FEC) claims that, as a corporation, Citizens United is prohibited by McCain-Feingold from spending money from its treasury on candidate advocacy. Nina Totenberg at NPR explains:

"That means the producing organization must publicly disclose who paid for the movie, and any broadcast ad must have a tag line disclosing the sponsoring organization and disclaiming any connections to any candidate's campaign. In addition, the court said, the movie could not be broadcast 30 days before a primary election."

I hope the Supreme Court finally uses this case to strike down McCain-Feingold. This is not because I agree or disagree with the content of this particular movie. But what McCain-Feingold tries to do is to differentiate between different modes of political speech, all of which is protected by the first amendment.

It is important to note that McCain-Feingold does not actually ban this type of speech, but it does place limitations on it. In this case, the most onerous is the one prohibiting corporations (yes, this includes your local homeless shelter) from paying for political speech which is made within 30 days of an election, if it mentions by name a candidate who is in that election.

I would point out that the most appropriate time for this kind of speech is precisely within 30 days of an election, as that is when people are most focussed on it.

I would also say that, for all practical purposes, this allows restrictions on books, movies, music, breakfast speakers, signs, and pretty much anything else in the wide universe of communicable ideas which the Court has wisely, and for many years, considered free speech.

Furthermore, this law is extremely susceptible to political influence. The prosecution of this law is left up to the FEC; in other words, the government will decide whether your speech will qualify as political advocacy or not. There is no possible way that the FEC can investigate everything might be covered by the law, and so they will have to pick and choose whose speech they will try to stifle. And in the course of doing so, they will also have to decide what they believe is political speech. Is Michael Moore's Fahrenheit 911 advocacy? Is a speaker at a historical society's breakfast meeting who mentions Bush in a passing comment practicing advocacy? Under the law, one would have to conclude that the answer is yes.

So we have government deciding what is advocacy, and what is not, which is a purely subjective endeavor from the start. And then we have government deciding what it will attempt to stop and what it will ignore, also a subjective enterprise. And this whole circus act is supposed to give us fairer and more free elections.

How did we get here? There has been a wringing of hands over the amount of money spent in national and state campaigns. The perception among the general public has been that the money is a corrupting influence. This perception has been encouraged by incumbents of both parties. But missing in this debate is the fact that incumbents have advantages that outsiders can only dream of. They have the political connections and favors owed that only incumbents can have. The media, in the course of doing their job, gives them unparalleled coverage, which they naturally use to promote their point of view, and of their candidacy. On a recent walk through San Francisco, I saw a sign proclaiming how Mayor Gavin Newsom was responsible for building a city park. What challenger can make that claim?

And the money, while at first glance seeming obscene, really isn't that much. According to the Center For Responsive Politics, total spending by presidential candidates was around $1.3 billion dollars, or roughly double that of the 2004 election. Seem high?

Consider that the fleet of helicopters being built to support the president is projected to cost $13 billion, or roughly 10 times the total expenditures by all candidates.

Consider also that $1.3 billion dollars is about $5.60 per eligible voter. $5.60 for each voter in arguably the most important presidential campaign in our lifetime.

This money is spent to educate voters on which candidate to vote for. It is not a necessary evil; rather, it is essential to the functioning of democracy. You could say, and I would agree, that some of this information is misleading, and much of it caters to the lowest common denominator, but to the extent that it is and does, it is the fault of the voter who has neither the time nor the inclination to think for themselves. But this also is the nature of democracy; it's ugly and imperfect at times, but it seems to be the best system we've got.

The lifeblood of democracy is ideas, and McCain-Feingold seeks to limit their propagation. At best it is a misguided attempt to make the system fair, at worst it is a cynical and Machiavellian attempt to game it for the benefit of incumbents. The Supreme Court should strike it down.

...and back

I took a break in early January to do some research, and found myself still researching four months later. I've found that my tendency to write about things I don't understand is balanced by a quixotic desire to understand everything before I write anything. The latter has kept my from writing lately. And the fact that I am posting today does not mean that I believe I understand very much.

I've been following Simon Johnson and James Kwaak at thebaselinescenario.com, and they, in turn, have been following the power struggle within banking system. Their belief is that the large banks and financial instiutions in the U.S. have formed an oligarchy, and that the oligarchs have now captured the regulatory and political system. They believe, and Johnson written as much in an Atlantic article, that the U.S. is becoming more like an emerging market, with all of the associated problems that that entails. They believe that in order to prevent crisis such as the current one from recurring more and more frequently, we will need to ensure that financial institutions are smaller and have less power. Banks that are "too big to fail", are also too big to control.

The struggle for power between these banking giants and the Obama administration is epic. It is easy ask why the government cannot just do something about these banks, or to assume that they are not unnecessarily rewarding them for their colossal failures. But to understand the power that the industry has, we must understand the manner in which it's derived. The Atlantic article is an excellent place to start.

Johnson and Kwaak have made a convincing argument the banking industry, and, indeed, the entire financial industry, must be reduced, both in scope and concentration. They focus mainly on the negative aspects of oligarchy and regulatory capture. However, a professional risk-management analyst has written a book which I believes points out another reason for the breakup of large banks and a downsizing of the industry. Richard Bookstaber's "A Demon of Our Own Design" makes the point that financial complexity can increase risk in a non-linear fashion, and that the industry's quest for perfect allocation of capital, and the realization of complete market efficiency, leaves it exposed to unseen risks.

In other words, the marginal efficiency gained from complex systems is overwhelmed by the added, and unseen, risk inherent in such a system. If you haven't been following the financial industry, the past 30 years or so have been marked the proliferation of modeling (which attempts to predict the future based on the recent past, through complex mathematical theories), an accompanying explosion in complex derivative securities (which add opacity and complexity to an already complex system), and the mergers and growth of financial institutions into corporations which are so big they cannot possibly understand or react to the risks they face.

These are issues that need to be resolved. The outcome is uncertain. Our government has loaned, given or committed to the cause close to the gross domestic product of the United States for an entire year, in an attempt to save the system. Some of this money was necessary. Some was not. Some was an outright gift to the management and shareholders of the institutions that precipitated the collapse. There are no easy answers here, no room for blind ideology or sound bite solutions. If we are going to have a say in our future, we need to learn and engage. And then speak out.

Afghanistan

Bob Hebert of the NY Times gives his take on Obama and Afghanistan:

"The U.S. military is worn out from years of warfare in Iraq and Afghanistan. The troops are stressed from multiple deployments. Equipment is in disrepair. Budgets are beyond strained. Sending thousands of additional men and women (some to die, some to be horribly wounded) on a fool’s errand in the rural, mountainous guerrilla paradise of Afghanistan would be madness."

I could not agree more. A conventional ground war against either Afghans or Al Qaeda operatives is the height of futility. History has shown that the only way to conquer this country is to occupy it entirely; we would literally need to move our entire armed forces into Afghanistan. And even then, we would only be squeezing the balloon. The Afghanis themselves have no inborn hostility towards the United States. The Taliban only gives help to Al Queda out of political convenience.

Terrorism itself is a psychological war. It cannot be won through conventional warfare; the only result is a campaign of Pyrrhic victories. It can only be won by changing the minds and hearts of potential terrorists. Conventional warfare against terrorism is a twisted game of whack-a-mole; one in which every dead terrorist results in the creation of two more.

We should, at this time and point in our economic history, realize that our resources are indeed limited. We must accept the fact that unsavory dictators will rule countries in ways that we will not like. We have to choose between a Quixotic quest to force Western civilization upon people who are not prepared for it or don't want it, and what may be our last chance to stay true to our American ideals and become the country that the rest of the world can look to.

Violence begets violence; further incursions into Afghanistan will only solidify our reputation as a country that will force its will on others without thought. Barack Obama has a real opportunity to make a difference, to change the perception of America throughout the world while saving American lives, Afghan lives, and American resources. Campaign promises are just that; when they are mistaken, they should be forgotten. Better them then the untold Agfhans and Americans we will lose if he does not.

Consent Cards

 I've been thinking about the recent call (made by the heads of a number of prestigious universities) to lower the drinking age from 21 to 18. In my line of work (I'm in the bar business), it's an issue that we deal with regularly.

I wonder where the resistance to this is coming from, besides MADD, who are understandably irrational about the subject. Are parents worried that their kid will start drinking to soon?

Maybe they are. But if they are, then maybe we can come up with a consent card, signed by a legal guardian, which would enable the 18-20 year olds to drink. Of course, it just as quickly occurred to me that 18-20 year olds don't have guardians, since, in every other aspect of life, they are considered adults. So, in a sense, this would be an attempt to work within a system that makes no sense.

Sometimes, though, in order to make progress, you have to compromise.  Perhaps a compromise would be for the states to come up with Drinker's Ed; a class that you could take when you got your drivers license that would enable you to drink in bars. If you passed the class, you would get a license that specifically allows you to drink. 

This system is broken. But tearing it all down overnight is politically impossible. We have to start somewhere, and maybe this is one way to do that. 

Blago vs Voters of Illinois

Rod Blagojevich is no saint. He's a classic Chicago politician who's taken Chicago politics to a new level. Or maybe he's just the first to get caught. But lost amid the furor over his appointment of Roland Burris to Barack Obama's vacant senate seat is the fact that he has not yet been tried, much less convicted, and is still the governor. His claim that he has the right and the responsibility to appoint a new senator is absolutely valid. 

The U.S. Senate has itself tolerated corruption on  huge scale for years. It has very little moral authority in this situation, and its refusal to seat Burris, who has not been connected in any way to this scandal, will likely result in a constitutional crisis. The voters of Illinois, and Chicago, in particular, have courted this crisis by ignoring and often embracing the culture of corruption from which this scandal was born. 

For now, however, the Senate must do its constitutional duty, hold its nose, and seat Mr. Burris. This is not a racial issue, as some have said. This is a constitutional issue. Mr. Burris may make a fine Senator in the end.

More Auto Talk

Looks like Hank Paulson is back in the news.

"WASHINGTON — The White House and the Treasury are deep into negotiations with General Motors andChrysler over reorganization plans that could result in freeing up more than$14 billion in emergency loans to keep the companies afloat through the first quarter of 2009, according to industry executives and a senior administration official...

...In the negotiations, the Treasury secretary, Henry M. Paulson Jr., is effectively taking on the role of “auto czar,” which was envisioned in the carmakers rescue bill written by the White House and Congressional Democrats and approved by the House but blocked by Senate Republicans."

I've made a number of posts about Paulson recently, and I thought it was time to check out his resume. So I went to that most trustworthy of all sites, Wikipedia, and took a gander at his page.

I'm glad I did! His career is quite impressive: football player at Dartmouth, as well as Phi Beta Kappa and an English degree (apparently, you CAN make money with an English degree), MBA at Harvard, assistant to John Ehrlichman during the Watergate scandal (which got Ehrlichman convicted and sent to prison), and then of course the career at Goldman Sachs.

But I didn't find the one thing that I was looking for. Maybe Wikipedia dropped the ball on this one, but I was sure I'd see a reference to his years as an analyst in the auto industry. Or maybe even a line or two about his days as a successful CEO of Ford, or some small reference to when he worked as a designer during the golden days of Detroit. 

I was doubly surprised because with all the talk out there of how ole Hank is "taking on the role of 'auto czar'", you'd think they'd update his page to reflect his deep reserves of knowledge and expertise in these areas. The White House is going to let him decide what to do with $14 billion, and if I know one thing about the current president, it's that he would never entrust large sums of money like that to someone who wasn't over-qualified to handle it. 

Of course, Hank has other qualifications for this kind of work. He's given away nearly $350 billion with a series of confidence-crushing, flip-flopping decisions in which he injected huge amounts of pessimism in to the financial markets. Smaller men would have tried to hide their incompetence, but Hank found a way to rise above the petty crimes and find a way to screw things up in such a massive and blatantly unapologetic way that he was instantly inducted into the Bush Administration Hall of Fame. 

Still, wasting taxpayers money on cars is a different animal altogether. I hope that he's up for the challenge.

The was another quote in this story that caught my eye:

“Because of the failure by Congress, we’re left with suboptimal options,” said Tony Fratto, the deputy White House press secretary. Cautioning that no decisions had been completed, Mr. Fratto added, “We’ll do what is in the best interests of taxpayers and the national economy.”

I am so happy that someone is going to step up and do Congress' job. When Congress does not pass a bill, it's a prima facie failure. You would think that after 232 years or so, we'd be able to figure out a way to make Congress pass bills every time something happens, but until we do, it's a good thing that the Bush White House is there to do what Congress can't.

Now, some people might say that Congress was performing it's Constitutional function, but I say that something needed to get done, and the fact that there weren't enough votes to pass a bailout for auto-makers is not enough to keep this president from doing what he knows is best. After all, this is a man who has consistently been on the right side of almost every major issue, and has been convincingly elected in a way that Congress never has, and, most importantly, he'll be in office for years to come and will be able, in his usual inimitable fashion, to take responsibility for how this all turns out.

I can't wait!

Bush - Projecting American Power In the Mideast Since 2000!

No one even seems surprised...

Don't Miss This Link

This is maybe the best thing I've read yet on the financial system meltdown. Michael Lewis is perhaps better known as the author of Moneyball, a fascinating look at economics of building a winning baseball team. 

Moneyball chronicles the revolution in empirical analysis of the actual worth of baseball players in what has grown to be a multi-billion industry. It is a celebration, of sorts, of what can be done with an open mind and the realization that much of what we think we know, we don't. 

I actually rekindled my interest in economics because of this transformation in baseball thinking. Baseball had always been a passion of mine- as a kid I religiously read the baseball section of the newspapers every morning before I set out to deliver them. But as I got older, I got tired of the same "analysis". The writers weren't telling me anything new, and they wrote as though there was nothing else to know about the game. By my high school years, I was no longer interested.

With the advent of the internet, however, I found writers and analysts who were not part of the traditionalist network, who questioned everything, and who applied empirical standards to their analysis. Baseball is a sport which prides itself, above all, on tradition. And analysts like Bill James and Billy Beane would have no part of it. 

It's unfortunate that there was no analogue to this on Wall Street. But often, this kind of shift in the way we think can only be effected by a cataclysmic shift in what we experience. If the last few months haven't provided this, I don't know what will.

It's Not Like He Didn't Warn You

If you enjoy watching someone get mocked for what they believe, and then get completely vindicated when it turns out they're right, you'll want to see this.

Reason For The Bailout

I'd like to look at the reasons being offered for bailing out Detroit and comment on them.

1. We will lose 1 million jobs. 

First off, if there are a million jobs associated with the auto industry, they will not go away overnight. Detroit still makes almost half of the cars and trucks sold in the US. One of these companies will find a way to survive. Which brings us to...

2. If one auto-maker goes down, they will all go down.

I have heard Ford's CEO say this, yet he has never offered any convincing evidence, nor have I seen the claim questioned in the media. The supposed reason is that a collapse of GM and Chrysler will result in the collapse of suppliers that service Ford. I find it hard to believe that this would be the case. There is still great demand for vehicles, even if it is down. As vehicle prices rise temporarily as a result of lower supplies, Ford will find a way to keep the suppliers in business. And the suppliers may have to consolidate or change as well. This will not be easy, and will result in job loss, but the job loss is coming one way or the other.

3. This will add an intolerable shock to the economy.

The economy is not going to collapse. Despite the confidence-destroying comments of Hank Paulson, the credit markets have not collapsed. Things will be not be as easy they were a year ago, but we are not going to witness the end of civilization. The economy will probably always go through booms and busts; it always has and it always will until we find a way to allow every player to have perfect  information. The economy right now is telling us that our information, which we use to determine the best place to invest money, was wrong. It is telling us to find a better place to put that money. 

4. We cannot lose such a big part of our manufacturing base.

Building on the last point, a manufacturing base that is losing money is not worth having. But there are, undoubtedly, manufacturing sectors that need capital and will use it correctly. They will create jobs that will last longer than Mar. 31, when we realize we've wasted $15 billion. But they won't get this capital if we insist on propping up broken companies.

I realize that real people occupy those jobs at GM and Chrysler. I know they will be hurt. I do not think it enough to say the hell with them. I think the government should find a way to help them- retrain them, make sure they have sufficient unemployment benefits, etc. We live in a society that can do that, and it is the right thing to do. 

But if GM was in the business of selling steam powered buggies, we would not be trying to save them in order to save the jobs. We would find different jobs for there employees. We should be working on this. It's time to move on.

De Facto Bankruptcy?

With the current auto-bailout bill dead in the water, Republicans are offering an alternative. At first glance it seems that the main differences between it and the previous bill are that the Car Czar would be required (as opposed to being authorized) to call in the loans if requirements are not met. Calling in the loans would, presumably, result in bankruptcy. 

The requirements are also changed. The bill would require the automakers to cut their debt by two-thirds, which is a huge amount. GM and Chrysler alone may have nearly $100 billion in debt. 

This seems to be a pseudo-bankruptcy. In a bankruptcy proceeding, debt can be modified by a judge. There will be enormous pressure on creditors to renegotiate their debt in order to avoid that situation. In this sense, the bill does more to force change. 

However, I don't believe this will have the intended result, if that is what it is. GM and Chrysler are facing imminent bankruptcy as we speak, and nothing is happening. No one will want to make the first move, although, in fairness, some creditors may be waiting to see if the government will write Detroit a blank check.

I hope it will not. Detroit cannot continue on the path it is taking. Chrysler is finished. GM can only hope to survive by downsizing enormously. Ford must do the same. We cannot let our sentimentality for these American icons compromise the future economic well being. Life will go on. 

Knowing The Rules

Here's a link to an interesting article about fund manager Bill Miller. After years of record-breaking returns, he lost everything by betting it all on companies like Bear Stearns, AIG, Freddie Mac, WaMU and other firms who were on the verge of collapse. 

Miller made a career and a fortune out of going against the market, but this time the market was right. There is an interesting quote in the story from Miller where he explains finally selling AIG shares because "we don't know the rules."

In fact, it seems to me that not knowing the rules was a big part of the problem here. Inasmuch as this is a crisis in confidence, the confidence has been lost because the rules of the game have changed. And the biggest culprit here may have the government, which arbitrarily picked winners and losers, nationalized Fannie and Freddie, and promised to buy mortgage-backed securities one day before switching to capital injections the next. Investors and lenders, after all, require predictable rules. When arbitrary decisions are forced on the marketplace from without, as was the case with the Treasury interventions, then predicting the future becomes far more difficult and risky, as does lending or investing. This, of course, leads to frozen credit markets, as lenders find themselves as deer in the swerving headlights of government.

Maybe we should have a plan ready for the next time. You can believe there will be a next time.

This Will Never Happen

More details from the proposed package: the Car Czar (I hate that term already) will have the power to demand immediate repayment of the $15 billion if he or she is not satisfied with the automakers' long term plans, or if they are not submitted by March 31.  This is meant to reassure taxpayers that their money won't be wasted.

In reality, there is almost no conceivable way that the Czar and his ministers, who are a political entity, will be able to demand repayment of the loan. Barring a miracle, calling in this loan would result in the immediate insolvency of both companies. Passively letting one of the Big 3 go bankrupt is politically very difficult; actively moving to cause their collapse will be impossible. 

In fact, denying further requests from Detroit for money will be almost impossible once the government is invested. The political cost of ignoring sunk costs will be far too high to overcome, and we will throw good money after bad.

There are two main components of the current economic crisis. One is a crisis in confidence, and the other is a crisis in misallocation of capital. For the most part, this has been limited to misallocating capital in the housing sector. This bill will exacerbate that by extending it to Detroit.

Car Czar to the Rescue!

The new bailout bill is approaching finalization. Among the highlights are Congress' insistence on the elimination of corporate jets and the creation of a "Car Czar".

Eliminating the jets is the bone to throw the taxpayers for the imminent immolation of $15 Billion or so, which will be only the beginning. I will venture that we will be lending all three automakers another $30 Billion or so by March. To quote the late Sen. Everett Dirksen, "A billion here, a billion there, and pretty soon it starts to add up to real money."

The Car Czar is much scarier. He will basically be running GM and Chrysler, (and soon, in all likelihood, Ford). The good news is that he will have oversight. The bad news, (which is so bad it renders the good news bad), is that the oversight will come from Congress and the White House. There may only be two institutions on the face of the earth that have proven to be more incompetent at management than the Big Three. And that would be Congress and the White House. And the incoming administration's most valuable asset in this regard will likely be their willingness to admit they know next to nothing about making money by selling cars.

There is still a good possibility that the Republicans will block this bill. Whereupon Wall Street will respond with another day of heavy losses and the Republicans will cave and pass a modified version. Because, as we all know, people who bought stock in GM were guaranteed to get their money out. Weren't they? No? It's getting hard to remember, after all.

 

The Real Fear

 

On January 1, 2007 Denver Broncos cornerback Darrent Williams was murdered in his limo during a drive-by shooting.

On November 27, 2007, 24 year-old Washington Redskins free safety Sean Taylor was murdered in his home.

On September 2, 2008, Jacksonville Jaguars offensive tackle Richard Collier was shot 14 times while he sat in his car, and was left paralyzed with an amputated left leg. 

On November 28, 2008, New York Giants wide receiver Plaxico Burress shot himself in the leg at a nightclub, and was subsequently arrested and charged with criminal possession of a handgun. The charges carry a mandatory minimum of 3 1/2 years in prison.

Public opinion was harsh. The media painted Burress as just another angry, young, (black) NFL player who thought himself above the law and was a danger to society. In the wake of the Michael Vick saga, whatever Burress gets he will deserve. But in light of the tragedies mentioned above, we should suspend our hasty judgment. 

We should pause to see this from Burress' point of view. His fear of getting shot or attacked is patently rational. He did not intentionally discharge the weapon. No one has shown or even alleged any malicious intent on his part in any way. He is a black man, with a gun and an attitude, and that's all we need to know.

There may be nothing that can be done for him. The ridiculously unfair mandatory minimum sentencing laws may doom him in the end. But the next time you see someone on TV talking about how we should throw away the key, if you find yourself agreeing then ask yourself this: if it was Tom Brady, how would you feel?

And the answer to that question may be be an indication that our problem with Plaxico isn't that he was carrying a gun, but that he is a young black male with an attitude. 

UAW

The UAW is saying that they are open to making a few concessions if that's what it will take to get a bailout from the government. They will not consider reopening contract negotiations.

I think that UAW management should listen to what GM's management is telling Congress (presumably, under oath.) They are saying that GM will be insolvent by the end of the year without more money. This is in 3 weeks. When they become insolvent, those contracts won't be worth the paper they're printed on. If they want GM to survive, if they want to continue to work in the auto industry, then they had better consider every option, and they had better be prepared to renegotiate everything. Congress is, remarkably, resisting help for a company and a union that will not change it's ways. 

The UAW has a sense of entitlement that is possibly exceeded only by that of GM's management. They continue to make claims of great sacrifice, as though their members are not compensated better than the vast majority of Americans. They call themselves the backbone of the country, but if they refuse to accept the changes that are needed, and cause the bankruptcy of GM, then they may instead become the straw that broke the country's back.

Where The Decider Got His Mojo

It seems as though neither Congress nor the White House are very interested in bailing out the automakers. And if they are, they obviously don't want to take credit for it. Sen. Chris Dodd today suggested that the Bush administration should take executive action, since it seems unlikely that Congress would act in time. 

If you stop and think about it, what Sen Dodd is really saying is that, even though the legislative branch (whose job it is to decide policy) has decided that bailing out Detroit is bad policy, the executive branch (whose job it is to carry out Congress' decisions) should ignore that decision and do whatever it wants.

The next time you hear someone in Congress complain about how the Bush White House has bypassed and marginalized Congress, and how they have used scare tactics to do so, consider how Sen. Dodd has advocated the abrogation of congressional responsibility. Recall how Congress did the same after 9-11. This is how the job of "Decider" was passed off to Bush. But when the president decides, democracy suffers.  

A $25 Billion Bet With your Money

The NYT has an article about the Chevy Volt, which is GM's upcoming hybrid vehicle. It's the vehicle that GM is claiming makes the automaker worth saving. And I think it is a perfect example of what's wrong with this company.

A GM executive says that people are ready for it, saying that people are used to plugging in things like PDA's and cell phones now, and so it shouldn't be a problem getting people to buy it. This is laughable, and a classic straw man argument. The issue with electric cars has not been that people are uncomfortable with the idea of plugging things in. Americans have been plugging in lights and record players and vacuum cleaners and all sorts of things for the last 100 years or so. The issue is that the car costs $40,000. And the average car buyer just can't afford that. If, in times of $2 gasoline, they would even want it is an another question entirely.

I also have serious doubts that GM is going to make any money on these cars, either. They are going to have to sell them at razor thin margins since they are already relatively expensive, and they aren't going to sell many of them. They sure as hell aren't going to sell enough of them to make a dent in their out-of-control cost structure. They are talking about selling 10,000 of them in the first year, which, as the article notes, is the number of Priuses that Toyota sold in October alone. If they made $10,000 on each one (which is a pipe dream, for reasons addressed below) they would net $100 million, or 1/250th of what they are currently asking Congress for. 

Furthermore, they are making a number of claims which, frankly, we should ignore. 

First, they say that the car will be ready in 2010. This means that the technology is not yet complete. If it was, they would be selling it sooner. Because it's not, the car could easily be pushed back, or never actually produced. This happens all the time. It has been delayed already, and GM's track record here is awful.

Second, they claim it will sell for $40,000. This is a guess on their part, since the technology and logistics aren't worked out, and the costs always find a way to change. Predicting the cost of building a car that will come out in 2 years, especially in this economic environment (and more so with a car that hasn't been completely designed yet), is pure folly. And asking for a $25 billion loan from struggling taxpayers on the basis of that guess is insulting. 

It is telling, as the Times states, that GM "has not said if or when it plans to make money off the Volt." And you better believe, when GM is begging Congress for money, that they are painting the rosiest possible picture for potential sales, profit, cost, and technology that can be imagined, if not outright lying about it.

More from the Times piece:

G.M. reportedly spent about $1 billion in the 1990s to develop the EV1, which it dropped after saying it could not make money on the cars. The EV1, which was available only in lease deals, sold for the equivalent of up to $44,000 but cost G.M. about $80,000 apiece to make........

In 2004, G.M. displayed a hydrogen-powered concept vehicle, the Hy-wire, at the Paris Motor Show, making similar promises that it would revolutionize the industry. Thus far, the Hy-Wire has not become reality.

Is there anything about the history of GM which would lead you to believe that they are capable of making money from this car? In a bankruptcy proceeding, the technology will not be lost. The division that is designing the Volt could be spun off as a separate entity, if in fact it were viable. So bailing them out so that the Volt can come and save the American economy and environment is ludicrous. There may be good reasons to bail out Detroit (although I have yet to hear one.) But the Chevy Volt is not one of them.

And Now GM

GM, which is burning through billions of dollars a month, believes that the government should give it another $20 billion or so to throw down the sinkhole with the rest of its shareholder's money. It says, with a straight face, that it just needs some money to get it through this rough patch. This from a company which has been steadily losing market share for years, is saddled with terrible products, redundant models, impossible labor contracts, and most importantly, has a management group that got it into this mess by being good at only one thing: asking the government for help. 

Its CEO is a man who gambled away the future of the company on gas-guzzling trucks, refuses to consider the possibility of resigning (believing that he is the only one who is capable of solving their problems), and likewise refuses to contemplate the possibility of a Chapter 11 bankruptcy filing, which is the only hope the company has without a government bailout (and, in all likelihood, even with one.)

It's management says that bankruptcy will hurt sales even more, as people will be unsure if the warranties on their cars will be honored (as if those warranties can't be insured), and they say this as if the sales numbers that have gone over a cliff don't point to a loss of confidence already. 

Its union, which has secured paychecks for over 8,000 people who don't go to work (!), and whose members make over 50% more than Americans who work at foreign-owned factories in the US and have benefits packages that average Americans can only dream about, complains that the hardship that their employees will suffer is so great that taxpayers making far less should be required to pay billions to support a company that is losing money so that they don't lose the jobs they believe they are entitled to.

GM is no longer a financially viable company. It must go through bankruptcy. Its shareholders must be wiped out. Its management must be replaced. Its debt must be restructured. Its labor contracts, more than anything, must be abandoned. None of this can happen without Chapter 11, and we should not contemplate government help in any form until the company agrees to all of these things.