Captains of Industry

If we don't know how many people, how do we know how many Congressmen we need

2010-04-08T19:26:00.000-07:00

I frequently see advertisements on the television and outdoors for the census in the format, if we don't know how many people we have, how do we know how many x we need.
Where x is hospital beds, classroom, trains, buses, etc.
http://www.youtube.com/watch?v=OP2BGqnPQY4

"The census helps us know exactly what we need, so everyone can get their fair share of funding.”

I am disappointed that this appeals to so many people. Have we really moved towards a society where we fill out a survey so the government can calculate our needs?

Of course, the primary purpose of the census to apportion Congressional seats and Electoral College votes among the several states by population. I believe that is an important enough reason to mail it back. This representative form of government is at least as important as the government handing out goodies from the fraction of people that pay the bulk of the taxes to everyone else.

Speech in a Free Society

2010-02-06T13:29:00.000-08:00

Everybody knows there is tons of money in politics. It is a natural consequence of the government regulating and controlling more parts of the economy. P.J. O'Rourke said, “When buying and selling are controlled by legislation, the first things to be bought and sold are legislators.” I am not writing to defend or advocate a particular size and scope of government in general. There was a Supreme Court decision regarding political speech recently, FEC v. Citizens United.

Background

Citizens United produced “Hillary the Movie” that said she was a power-hungry viper unfit for the presidency. They wanted to make this available in theaters and through video on demand systems.

Analysis

You would think that they would be free to distribute this move however they saw fit in a free country. However, the Bipartisan Campaign Reform Act of 2002 did not permit “issue ads” 60 days before a general election and 30 days before a primary election. Issue ads simply take a position on some policy and typically associate a candidate for or against that policy. The law called for heavy fines and jail time for daring to speak out in a way that the law did not permit. So, basically this prohibited an organized group for people from making political statements.

In the recent case FEC v. Citizens United, the Supreme Court struck down major parts of BCPA. Anthony Kennedy in the majority opinion writes,

“Thus, the following acts would all be felonies under §441b: The Sierra Club runs an ad, within the crucial phase of 60 days before the general election, that exhorts the public to disapprove of a Congressman who favors logging in national forests; the National Rifle Association publishes a book urging the public to vote for the challenger because the incumbent U. S. Senator supports a handgun ban; and the American Civil Liberties Union creates a Web site telling the public to vote for a Presidential candidate in light of that candidate’s defense of free speech. These prohibitions are classic examples of censorship. “

While most have an idea that censorship is bad policy, he gives a great reason why we should not censor political speech, “speech is an essential mechanism of democracy, for it is means to hold officials accountable to the people.”

The content of the speech was not so much at issue as was when it was going to air and who sponsored it. I agree with the majority opinion that the identity of the speaker does not determine rights. Just because a group is too influential that is not a justification for withholding First Amendment rights.

Not everyone agreed with the outcome of this case, in fact it was a 5-4 decision. In a weekly radio address, President Obama said, “this ruling strikes at our democracy itself.” While some are worried about the outcome of this decision and perhaps justifiably so. However, a law cannot be upheld because it produced good outcomes or invalidated for bad outcomes. The Court rules on the law with the Constitution as the highest law in the land.

As a practical matter, political free speech is necessary for a functioning republic and it is exactly what was intended to be protected whether it's the ACLU arguing against the Patriot Act, the NRA advocating for less restrictions on guns, or a group advocating for or against abortion rights. And they need to be able to say whether candidate x is right or wrong on these policies whether they are a single person or an association. The life and death of the Republic depends on the freedom to make exactly this kind of speech.

The argument that we are treating corporations as people is a spurious distraction. We are simply saying that individuals are able to pool their resources and can speak in concert. Corporations are not people any more than your car or computer is a person, but the stockholders, directors, and others that control the corporation do have rights. Remember that while Hillary the Movie was funded by a corporation, people made the movie to express views that themselves and other people had. If we argue that corporations or other associations have no rights, do we then allow searches of corporate offices without warrant and cause or arbitrary expropriations without due process?

I believe that the dangers of this ruling are exaggerated. Big media big money speech is losing influence, not gaining influence. Grassroots efforts are being organized via Twitter. Bloggers and news aggregators run from the bottom up decide what is important, and I believe this trend will continue.

The solution to more corporate speech if that comes to pass is more speech from everyone rather than muzzling organized groups and chilling free speech.

Reality Still Matters

2010-01-21T19:09:00.001-08:00

An exchange rate held to an unnatural level and prices restricted by government decree are a familiar tune. In Venezuela, some have bolivars and want to buy dollars for their imports. The government has tried to maintain a fictional exchange rate and has rationed dollars, but markets are what arise naturally whether you want them to or not.

Predictably, the Venezuelan government's restrictions on foreign exchange and price controls are not working and these controls are creating problems that they try to solve with yet more controls. More rules cannot repeal reality and they only serve to create corruption, discourage foreign and domestic investment, and slow production. The sellers of goods are understandably reacting to the reality of more bolivars in circulation by raising prices. You can tell people to ignore reality and sell at the old prices, but the historical record is that people are smarter than that and it never works.

Chavez accomplishes his objective of increasing government control exceptionally well. As he is moving so quickly and with quotes like this,“People, don’t let them rob you, denounce it, and I’m capable of taking over that business" it is obvious what he wanted all along. Perhaps the motives of politicians here are more pure, but if something like the Senate healthcare bill passes it will 'require' more controls to fix the problems it creates.

The American Dream

2009-12-24T18:53:00.000-08:00

I have been thinking lately in the wake of this real estate bubble, why do people buy homes. Over the past few days, I wrote down a few reasons and some brief commentary.

At a certain age or after a life event like marriage or the birth of a child, it’s time to buy a house.

Hard to argue with someone’s emotional connection to home ownership, except to say that it is not the way I think.

Flexibility to remodel and get exactly what you want without consulting a landlord.

I do see a benefit here in being able to customize your living space. While custom build-outs are relatively common in commercial space, rented housing is whatever you can find on the market.

A forced savings plan

Some people are not good at saving money, and since each month you pay some principal you are effectively saving. This reason does not hold any personal relevance to me as I do save. It is analogous to the person that deliberately seeks to get an income tax refund even though it is giving an interest free loan to the government.

Pride of ownership

Again, hard to argue with someone’s emotional connection to home ownership, so I won’t.

A good investment

This is really just speculation on price appreciation, not that there's anything wrong with that. The long term record of housing prices does not show that it is a great investment. Yale Economist Robert Shiller calculated an average of 0.4% / year price appreciation from 1890 to 2000. Mind you, this is for a very illiquid asset with an appreciable amount of volatility.

Buy into the myth that rent is throwing money away

When you rent you are paying for a valuable service, the roof over your head, maintenance of the property, and often utilities. You’re not throwing money away for that service any more than any other service you buy. In some markets a couple years ago, buying was much more expensive than renting even over the whole term of the mortgage. As compared to buying where you “throw away” money on interest, property taxes, and repairs.

The types of properties available to rent are less desirable than ones to buy

Varies. I have heard that there has been an increase in single family homes in the suburbs available for rent.

Concerned about rent increases

A fixed rate mortgage will lock in some of the expenses for housing, but don’t forget about property taxes. Those can move upward quickly in some areas.

Tax benefit for owner occupied property

The mortgage interest and property tax deductions can help make owner occupied property make economic sense. Remember, these are below-the-line deductions in lieu of the standard deduction. So, you can get a maximum benefit of your expenses * marginal rate.

Anything I missed, please comment.

45 Percent of the World's Wealth

2009-12-14T18:55:00.000-08:00

When I think of wealth destruction, I think of fires, floods, wars, and hurricanes. Steven Scharzman of Blackstone said “Between 40 and 45 percent of the world’s wealth has been destroyed in little less than a year and a half." Given that you'd think a meteor struck Earth or something of that scale.

The most relevant concern is the real wealth that has been destroyed. Paul Graham tells us, "Wealth is the fundamental thing. Wealth is stuff we want: food, clothes, houses, cars, gadgets, travel to interesting places, and so on. " Nominal dollars are not irrelevant altogether. If you have a mortgage, it is still due on the nominal amount you agreed to pay. Negative equity may induce people to stop paying their mortgage and the property will have to be foreclosed upon. This situation can result in inefficiencies as a result the destruction of real wealth.

I agree that some real wealth could have declined through:

Depreciation in excess of gross investment. Left alone, wealth will decay and continual investments must be made to maintain that wealth.
Inefficiencies in the transfer process from debtor to creditor where the collateral is damaged through poor maintenance or malice.

I certainly agree that the pace of wealth creation is slowed and that there may even be some wealth destruction, but I doubt that it 45 percent of all wealth in the world.

The fact that people paid too much for assets a few years ago, and that now the assets are worth much less does not mean real wealth is reduced. I suspect this wealth that Schwarzman talks about is from on 1s and 0s on a computer system. Your house is not any less of a house now because it would sell for a third less dollars. The 3 bedrooms, 2000 square feet, 2 car garage, granite countertops, etc. are still there for your use.

I doubt that 45 percent of the world's wealth has been destroyed with most buildings still standing that were there 2 years ago, airplanes still taking you where you want to go, and your computer accessing a global network that is better than ever.

Is it too easy?

2009-12-04T17:04:00.001-08:00

I am actually not too concerned over the sheer number of fulfilled requests by Sprint. It appears this is the number of data points retrieved through Sprint's systems for law enforcement. So, the actual number of people that were under surveillance was likely in the thousands. With tens of millions of subscribers, this is not too shocking.

The bigger issue here is the lack of accountability for the watchers. There are legitimate law enforcement uses for GPS information, text messaging, phone calls, etc. While I think there should be a procedure for the government to acquire this information, the lack of documentation and accountability is very troubling. The temptation to spy on political opponents that have done nothing wrong except disagree with you rises when the DOJ does not answer to anyone. It is not difficult to imagine that people in power that will spy for their own personal advantage. Even now, we cannot be assured that this is not already taking place.

Links - http://paranoia.dubfire.net/2009/12/8-million-reasons-for-real-surveillance.html

http://arstechnica.com/telecom/news/2009/12/sprint-fed-customer-gps-data-to-leos-over-8-million-times.ars

"The government routinely obtains customer records from ISPs detailing the telephone numbers dialed, text messages, emails and instant messages sent, web pages browsed, the queries submitted to search engines, and geolocation data, detailing exactly where an individual was located at a particular date and time."

"The fact that federal, state, and local law enforcement can obtain communications "metadata"—URLs of sites visited, e-mail message headers, numbers dialed, GPS locations, etc.—without any real oversight or reporting requirements should be shocking, but it isn't. ""Soghoian's lengthy post makes at least two important points, the first of which is that there are no reliable statistics on the real volume and scope of government surveillance because such numbers are either not published (sometimes in violation of the legally mandated reporting requirements) or they contain huge gaps. The second point is that the lack of reporting makes it difficult to determine just how involved the courts actually are in all of this, in terms of whether these requests are all backed by subpoenas."

"However, communications or customer records that are in storage by third parties, such as email messages, photos or other files maintained in the cloud by services like Google, Microsoft, Yahoo Facebook and MySpace are routinely disclosed to law enforcement, and there is no legal requirement that statistics on these kinds of requests be compiled or published. "

Some Game Theory

2009-12-01T19:04:00.000-08:00

I am reminded of a counterintuitive result that more people nearby will result in less action. The typical example in a game theory course is a crime witnessed by n people. As n grows, the likelihood that the police will be called actually falls. While this phenomenon has been well documented, I have recently observed a case where this is not true. An email was sent out to a mistakenly listserv. The recipients hit reply to all to inform the sender. As a few emails were sent, this took on a life of its own. Between the initial emails, replies to those emails, and emails telling people not to reply to all there were about 50 emails in all.

A couple possibilities

The game theory result is still correct. Where n increases, the probability of any reply falls. However, if the first reply to all is sent everybody will jump on the bandwagon.
This situation calls for a different set of assumptions than the typical game theory situations of shared responsibility.

It takes all kinds

2009-11-30T19:57:00.000-08:00

I saw an article recently talking about Google's presence in Japan. It is one of the few countries they have not dominated.

"Earlier this year, Google’s splash page for Japan abandoned the company’s classic spare design and added links to YouTube, Gmail and other services — an attempt to lure Japanese users who favor sites decorated with a cacophony of text and graphics." ----NY Times

I am not sure why anyone would want a cacophony of text and graphics. It's distracting, loads slowly, uses lots of memory, and has a tendency not the render the same way across browsers, screens, etc.

Future of Journalism

2009-11-30T19:06:00.000-08:00

The old business model for journalism is clearly on the decline as we can see from the bankruptcy filings of major newspapers. No business model is guaranteed to persist in an economy that allows creative destruction, but people's needs still need to be fulfilled in one way or another. It takes a lack of imagination to think that journalism is dead. The 20th century newspaper business model is dying for sure. I think that people still want facts to be gathered and commentators and aggregators still need a primary news gathering as support. I believe that some model will allow companies to make money by producing news whether that involves microtransactions, a separation of content and distribution (similar to ASCAP in the recording industry), or something nobody has thought of yet.

I went to a round table discussion on political journalism and I had a couple takeaways. I may turn this into a more detailed blog entry later.

Journalism was never that well paid to begin with
Much of what's available on the Internet, TV, etc. is aggregation or commentary rather than primary news gathering
Newspaper model is clearly in the past. I wish the roundtable had gotten into some detail about possible business models and payment systems. At some point I will go into more depth.
The issue with non-profit news gathering groups as a solution is that they don't care as much about interesting stories. They may cover "important" stories that nobody will listen to or read since they don't have nearly the incentive to get eyeballs.

Oh come on

2009-11-15T13:05:00.000-08:00

Useless Features

2009-11-15T08:49:00.000-08:00

Conversation

MC : have you ever used the web in windows to search what program opens a file type and been successful?
DR: no
DR: it's about the most useless feature
MC: i know
MC: it's laughable
DR: up there with copying a file and relying on the time estimate
MC: hahaha

This Time It's Personal Finance

2009-11-15T07:50:00.000-08:00

I have taken some time to clarify my investment style for this blog and for myself without making any specific investment recommendations.

Value, concentrated investing – While many seek the diversification of the full market portfolio, I speculate on a few investments I believe to be a great value. Growth companies have historically underperformed value stocks as investors systematically overestimate growth. Earnings growth regresses to the mean, and value typically is a better investment. A purely quantitative black-box strategy could evaluate the entire market and find value stocks. However, I am examining a company’s strategic position, financial statements, and conference calls. A portfolio of a small basket of investments that are in different sectors will get most of the benefits of diversification.

International exposure – Most investors in any given country have a home bias. While there are barriers in understanding and in regulations to investing in other countries, it seems excessive. I seek to invest a high percentage of my investments outside the United States in emerging markets. In the cases where I cannot buy individual stocks, I buy exchange traded funds that give exposure to a particular country or region.

Liquidity is not all that important – Most of my investments are fairly liquid at this point in time since I am unable to invest in private equity and venture capital. However, I am willing to make illiquid investments if I am compensated for that illiquidity. You can maintain liquidity on tap with credit lines at a very low cost to maintain.

Leverage – At this time, I have cheap access to credit to borrow against investments in my portfolio. While leverage increases risk, I am in a great position to assume that higher risk. With a greater base of assets, my return on equity will be higher assuming my asset’s returns are greater than my borrowing rate.

Thanks to Dave Albrecht for asking me to write about my investing philosophy

We are HTC

2009-11-14T17:59:00.000-08:00

HTC has been a major producer of smart phones for the last several years, but many of their phones barely acknowledged where their origin. I have an HTC Tytn II, which is better known has an AT&T 8925 or AT&T Tilt. HTC is now bringing its name to the foreground with an advertising campaign, "You."

I really appreciated the images and music used in the commercial. Here's the script -

It’s the first thing you see in the morning.
And the last thing you see at night.
It stresses you out.
And calms you down.
It helps you remember.
It helps you forget.
It keeps you connected.
It’s the only thing that is alway within an arms reach.
Which is why you don’t need to get a phone.
You need a phone, that gets you.
And you. And you. And you.
And we are HTC.

It seems that someone really understands how people use their phones and people's connection to their phones. HTC has such a broad line of products across price points, feature sets, and operating systems their advertisements have to be about experience not specific features, apps, and utility. (Contrast to an Iphone ad)

Corporate Speech

2009-11-12T16:33:00.000-08:00

I recently found myself in an argument about the rights of a corporation to speak on political issues. To give some context, it was a long discussion beginning with talk of the bailouts and financial regulation and moving towards whether corporations have a right to speak and corporate personhood in general. While there was plenty of fodder for blog entries, I am addressing the corporate speech issue.

Shareholders have interests in a company doing well and sometimes regulation or tax policy is a critical issue. Shareholders and directors acting on behalf of themselves have the right to advocate for or against various issues. I think most people would agree to that proposition.

However, in order to be effective in promoting the interests of the shareholders the speech needs to be coordinated. In practice, the transaction costs are far too high not to do so and shareholders are not neccessarily aware of all the issues that are relevant. They have appointed directors to deal with that and anything else in the day to day operation the the company.

In principle, people do not lose rights when they pool their resources and appoint agents to represent them.(a corporation) "Issue" ads are exactly the type of speech that was intended to be protected. To prohibit corporate speech in favor or against policies is to tie the hands of the shareholders and effectively prevent them from promoting their interests.

Responding to Incentives

2009-11-07T20:44:00.000-08:00

I believe that people can be intelligent consumers of health care with the right information like anything else. A big part of the problem with health care is that the true cost is not borne or known by the users of health care. While there will always be a need for catastrophic health insurance to cover unexpected events, the more frequent costs could be covered by consumers. Tax policies have encouraged "all you can eat" health care paid for by a third party. No surprise that people in this regime would consume more health care at greater and greater costs. Not only is the demand higher, there is an incentive to shift costs on to third party payers.

Given this background, I found this piece from the WSJ interesting on new websites to assist with finding pricing information for medical procedures. http://online.wsj.com/article/SB10001424052748704222704574499623333862720.html

No, you're wrong

2009-08-25T18:32:00.000-07:00

I was not thinking about this until I saw an article about the Social Security "freeze." For those of you that don't know, Social Security benefits are indexed to inflation (the CPI). I will not get into the messy details of how the CPI is calculated, but the basic idea is that if the cost of living rises 5%, Social Security benefits will rise by 5%. For 2010, there will likely be no increase since we are currently experiencing deflation and the purchasing power of dollars is increasing. However, the law does not allow for a reduction in benefits if there is deflation. I see it again and again -- people do not understand real purchasing power versus nominal dollars.

That means a freeze in Social Security payments will translate into a drop in real purchasing power for many seniors, said Jo Wiejahn, a senior citizen in South Bend, Ind.
“Any time the ... income stays the same but everything goes up from the groceries, car maintenance — everything — you are actually going backward,” Wiejahn said. “Even though I work, the fact that my Social Security is going to stay the same is tough, because that’s basically the money I depend on.”
http://www.msnbc.msn.com/id/32544620/ns/politics-more_politics/

Actually, since there is deflation right now, everything isn't going up. Since there is deflation right now and the law prevents a reduction in benefits, the purchasing power of social security benefits is rising -- but don't tell that to Rep. Phil Hare D-ILL

U.S. Rep. Phil Hare, D-Ill., called it "unconscionable" that Social Security recipients won't get a cost-of-living increase next year.

He said he would support any congressional action aimed at reversing the decision, including introducing legislation if necessary.
http://www.qctimes.com/news/national/article_49734f92-91cc-11de-8c31-001cc4c002e0.html

In the interest of fairness, some do make the point that healthcare costs are still rising and the elderly disproportionately spend on healthcare. While this does illustrate a problem with the CPI in general (consumers have different baskets of goods they buy), my main point is that everyone needs to understand their real purchasing power, not the nominal they have.

Speculator, you say that like it's a bad thing

2009-08-25T17:47:00.000-07:00

I guess you would say I'm a speculator. I have some assumptions about the world and I look for pricing that differs from those assumptions. If I win, I get to keep my profits. If I lose, I don't get bailed out by anyone. (The same can't be set for some major investment banks with proprietary trading arms)

Speculators have been blamed for rises in oil prices, driving down stock prices through short-selling, market crashes, etc. The reality is that we need speculators able to act on their beliefs, to buy or to sell. Politicians often judge that one price is too high or another is too low. I think it would be foolish after what we have seen over the last couple years to say that the market always get the "right" price at every point in time. However, the alternative is the government setting prices, which I have far less confidence in than the market.

A restriction on the activity of speculators would severely reduce liquidity in markets. Information would travel slower and those with the best estimates of the future would be less able to bring a market back to equilibrium.

Real Change

2009-08-15T09:24:00.001-07:00

These are two photos I took from the Jefferson memorial. I really liked the quote in the second photo.

Newspeak

2009-07-18T08:05:00.000-07:00

This weekend I downloaded real page turner. (And the summary)

From the summary:

The Health Choices Commissioner specifies the benefits that must be made available in each year – including a requirement that each participating plan provide one basic plan in each service area in which they operate. It is then optional for the plan to offer one enhanced and one premium plan. The differences between the three main plans (i.e. basic, enhanced and premium) are the levels of cost‐sharing required, not the benefits covered. The Commissioner shall establish a permissible range of cost‐sharing variation that is not to exceed plus or minus 10% with regard to each benefit category.

The Health Choices Commissioner sounds like Newspeak to me. We'll get the choices that the allow for us to have, no more no less.

Since reading this is clearly too much of a task for one person if you're not being paid to do it, I would be open to any insights that readers of this blog happen to have.

The Public Option

2009-07-14T16:51:00.000-07:00

I have a healthy degree of skepticism that the public option might not compete on a level playing field with private insurers. I found a publication from the American Academy of Actuaries that explains some criteria for a public plan that would compete on a level playing field.

I just can't be too surprised

2009-07-08T19:20:00.000-07:00

If you liked the first stimulus, you'll love the second one. Politicians, particularly Obama and Congressional Democrats are nervous that the stimulus is not enough. First, look at some basic facts and reasonable judgments.

A Few Points

A small proportion of the stimulus has been spent - A $100 billion just isn't what it used to be. In addition, a majority of the $110.3 billion was spent in the month of June. Other articles, I've seen show that even less has been spent.

Economists say that only 10 percent of stimulus dollars have been spent and the president's plan has been criticized for not creating enough jobs.

Most agree that there is a lag - The economy is a complex system and nobody expected the stimulus to work instantaneously. Given that little spending out of the total has occurred and a majority was spent last month, it is too early to know what's working. Pushing the button again won't help in the near term.

States are using the money for short-term needs - People were promised grand projects to increase efficiency and build American infrastructure. However, much of the money has been used to close short-term budget gaps.

Cash-strapped states have used federal stimulus dollars to close short-term budget gaps and avert major tax increases but generally have not directed the money toward long-term expansion, according to a new report.

I had a few other observations, but these are the most important ones that I have for right now.

How else could it have been done?

Drop it from helicopters
If you remember the great economist Milton Friedman, he proposed that we "drop money from helicopters" in the event of a liquidity trap. This bypasses the slow and often inefficient process that we face in finding "shovel-ready projects" (or the latest phrase we want to use). If individuals receive money they are limited to a few broad options to dispose of the money.

Spend or invest
Save
Pay down existing debt

If you believe that deficit funded fiscal stimulus can stimulate the economy, spending or investing the money obviously helps matters. In this particular economic downturn, there are serious issues with the banking system. If individuals don't spend or invest, they can save put their money into banks. The banks would have a larger deposit base and less issues with liquidity. However, the best result may be that individuals pay down their high debt levels. Finance author and perhaps philosopher, Nassim Taleb, argues that the global economy needs $40 to $70 trillion in deleveraging.

Grant it to the States on based upon a simple formula
Much of the money is being administered by states for projects or being used to prop up state budgets. If we want to have the States administer the funding for projects or simply prop up their short-term budgets, a simple approach would be to transfer an amount calculated in proportion to population, state product, taxes to the Federal government paid by its citizens, or some other available measure. The Congress does not have a tendency to be succinct, and a stimulus bill on one a sheet of paper is not likely to happen (or at least short enough to be read).

Some combination of individual stimulus and grants to the States
Combining these two approaches should not result in a stimulus bill so long that you would fall asleep reading it. The approach that Congress actually used has not been shown to actually focus on long-term, high return investments. A quickly enacted and carried out stimulus that simplistically dropped money from helicopters to the States and/or individuals would likely pack more of a punch. (If you grant the initial premise that deficit spending will stimulate the economy)

I will be continuing to research this issue with the following sites:
Stimulus Watch
Recovery.org

Thanks for reading, tell your friends.

California IOUs

2009-07-07T15:53:00.000-07:00

The largest banks in California including Well Fargo and Bank of America have accepted the IOUs in the past. Now, some banks have said they will stop accepting the IOUs at the end of the week.

From this, a market is arising for California IOUs. If you look on Craigslist in San Francisco, there are dozens of ads for "IOUs Wanted."

This raises a few issues

1. Is this a state-issued currency? It is used just like a currency, except that there is an explicit interest bearing feature. If it is a currency, that runs into constitutional issues.

No state shall enter into any treaty, alliance, or confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make anything but gold and silver coin a tender in payment of debts; pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts, or grant any title of nobility.

2. What are they worth if the state does go bankrupt? I have some idea about what happens with a corporation goes bankrupt, but I don't know much about the equivalent for a State.

3. Banks are accepting the IOUs and some may continue to accept them after this week. How do they impact the bank's capital and what does the US Treasury have to say about it?

2009-07-07T15:16:00.000-07:00

Changes in regulations try to solve the last crisis rather than prevent a future crisis, and in large part it's the only thing that they can do. In this time of changing regulation, we should think about how difficult it is to gauge regulatory effectiveness in a complicated financial system. What I'm trying to say is that we know when something bad has happened, but how do we know when we've prevented something bad from happening through regulation?

Looking at the historical data as a guide to regulatory effectiveness is a poor guide. The structure of the economy, the financial system, and other regulations has changed substantially over the last couple hundred years and even the last 50 years in which we have data. Huge changes in communications, growth in financial products for consumers, changes in goals and execution of monetary policy, and changes in culture have left us with an system that is different than it was just a few decades ago. Using history as a guide for the regulation of today's financial institutions should be done with caution - we only have a very small sample.

Even if there are lots of regulation on financial services, people will still do things that do not make sense and recessions will still happen. We know that regulations can stifle innovation by making it more expensive or impossible to change. While the costs of regulatory compliance in terms of management time spent or legal compliance costs may be known or knowable, the cost of opportunities not pursued and chances not taken because of complicated or inflexible regulations will never be known.

On a final note, I do think there is a place for some regulation in financial markets. However, I also worry about regulations that are the equivalent of a 10mph speed limit on the interstate.

Nobody is above the law

2009-06-30T17:22:00.000-07:00

It is easy to get the impression from many news stories and the reaction by Obama that the recent events in Honduras are something like a typical military coup. The circumstances of this case show that the military was merely enforcing the rule of law and providing force to other institutions that operate within the law.

President Manuel Zelaya brought this upon himself by his disregard for process and rule of law.
http://news.yahoo.com/s/ap/20090626/ap_on_re_la_am_ca/lt_honduras_constitution

http://blogs.tnr.com/tnr/blogs/the_plank/archive/2009/06/29/fetishizing-the-presidency.aspx
There were some particularly interesting quotes from the article above.

"Under Honduran law, soldiers are normally responsible for distributing ballots ahead of elections, but the military leadership has opposed the vote. Zelaya has fired the military chief for refusing to support the referendum and vows to ignore a Supreme Court ruling ordering him reinstated."

"Congress — led by members of Zelaya's own Liberal Party — has opened an investigation into his mental stability and could declare him unfit to govern."

"It followed a series of clearly unconstitutional moves on Zelaya's part, including his attempt to unilaterally remove the chief of the army, which, according to Honduras's Constitution, can only be done by a congressional super-majority. "

Zelaya broke the law and put himself above all other insitutions.

"Congress cannot investigate me, much less remove me or stage a technical coup against me because I am honest, I'm a free president and nobody scares me."

He believes himself above the law.

"The Supreme Court, Congress and the attorney general have all said the referendum he is sponsoring is illegal because the constitution says some of its clauses cannot be changed."

"The constitution, approved in 1982 as Honduras was throwing off two decades of nearly uninterrupted military rule, states that any politician who promotes presidential re-election will be barred from public service for 10 years."

The constitution prevents a strongman from developing at least through legal and constitutional means.

The other side of this matter is the complaints of a "rigged system" in Honduras. As in many third world countries, there are huge inequalities in power, wealth, and income. However, these moves by Zelaya do not move Honduras in the right direction. Zelaya was following the typical pattern of a dictator in the making. (much like his ally, Hugo Chavez) of undermining other institutions. This continues until arbitrary and unchecked power is vested in one man or a small group of people. The power of a charismatic leader to undermine institutions for some stated noble goal can be substantial. Sometimes this happens through the consent of an unwary people, while at other times substantial irregularities in electoral process do not reflect what the voters actually want. In either case, this power must be checked before it is too late and no other functioning institutions are left to contend with executive power. Term limits are one attempt to prevent the accumulation of power in one man or branch of government. It is inadvisable to entrust so much power to one man and one institution regardless of how noble he says his purposes are and how great some people think he is.

Leaving TARP

2009-06-17T20:52:00.000-07:00

I'm catching up on my DealBook, and I caught this article on leaving TARP.

The repurchase of preferred stock is easy to price, but the warrants are more difficult to value. However, using Black-Scholes a reasonable approximation of the value can be made. Basically, there is enough leeway in the assumptions made about pricing and the conditions on the warrants, that the range could be very large for prices that are fair for both parties.

Chrysler Bankruptcy and Demagoguery

2009-05-29T12:26:00.000-07:00

Some of Chrysler's creditors rightfully objected to bankruptcy plan that gave most of the company to holders of unsecured claims (the UAW) above the secured debt holders. The bankruptcy code calls for absolute priority in any Chapter 11 reorganization. In the case of Chrysler, this means that the senior secured creditors must receive at least what they would have received in liquidation before anyone else is paid. The art and science of valuation plays a key role in determining the estimated liquidation value and the value of the non-cash settlements distributed to claimants.

Politicians have used the Chrysler bankruptcy for demagoguery and seek to bypass the usual legal processes. Michigan Congressman John Dingell stated, "the rogue hedge funds that refused to agree to a fair offer to exchange debt for cash from the U.S. Treasury – firms I label as the “vultures” – will now be dealt with accordingly in court." The governor of Michigan said, "It also came in spite of a few greedy hedge funds that didn't care how much pain the company's failure would have inflicted on families and communities everywhere. Their refusal to share in the sacrifice forced bankruptcy proceedings to begin." Finally, Obama said that they were "a small group of speculators" who "endanger Chrysler's future by refusing to sacrifice like everyone else."

Ultimately, a bankruptcy that violates absolute priority based on political pressure sets a bad precedent on a couple of levels. First, it is damaging to the rule of law. The bankruptcy codes and precedents are well-established. While there are technical issues in valuation, the spirit of absolute priority is the central issue. The dissident claim holders in the form of the non-TARP lenders had every right to demand their fair share. Politicians have no right to demand that secured lenders sacrifice so that the UAW or anyone else could get a better deal. It does not matter at all that these creditors were "rogue" hedge funds or that many did not pay face value for their claims -- the rules of the game are already set for this bankruptcy. To blame "speculators" and hedge funds is nothing less than classic demagoguery. Second, the consequences in the capital markets may be far-reaching. How will debt be priced if security is meaningless in practice and determined by your favor with politicians? It is similar to the cram-downs on mortgages. It sounds like a way fix the housing markets in areas where many are under water on their mortgages, but it would be difficult to expect that mortgage rates in the long-term.

Some defend the "speculators" because of they are pension funds representing ordinary workers.

Far from being speculators, these funds represent retired public employees, including cops and teachers. The funds paid a premium to buy "secured" status, only to discover that they were politically outranked by the United Auto Workers in the White House hierarchy.
WSJ 5/21/09

This is a true statement since the financial markets affect wealth far more than direct holdings indicate. However, this cannot be the major point of the defense. It does not matter whether the claim holder is a "rogue hedge fund" or a fund for widows and orphans--the bankruptcy courts are not a place or charity. To do anything other than follow absolute priority is to ignore rule of law.

The Yield Curve is Getting Steeper

2009-05-28T08:36:00.000-07:00

The term structure of interest rates (the yield curve) has historically been a leading indicator of economic indicator. Over the last few months, the yield curve has become much steeper. The December lows on the 30 year was 2.52% with the 3 month at basically 0. Since then the 3 month has moved up, but not by much while the 30 year has soared to over 4%. A steeper yield curve is a good sign for economy. It indicates that there will be higher interest rates due to more demand for capital. The yield curve has typically been a good indicator, but one has to wonder if the same rules apply in this situation.

MSNBC is typically a waste land, but...

2009-05-27T14:30:00.000-07:00

Rachel Maddow on MSNBC delivered a scathing critique of a recent Obama speech. Obama criticized Bush policies on detainees, and then in the same speech he claimed the authority to do the same things as Bush. I do not watch her show, and I would probably disagree with most of her policy stands. However, she gains some credibility by applying the same standard to her guy as Bush.

http://www.youtube.com/watch?v=1uuWVHT1WUY

Social Security and Medicare

2009-04-14T20:07:00.000-07:00

I am currently taking a financial statement analysis course, which covers a number of accounting issues that have wider implications in the economy. The adjustments to property, plant, and equipment, leases, inventories, and pensions are made by financial analysts to get closer to economic reality and the prospects of a company. With current payroll taxes and benefit schedules, there is a substantial unfunded liability that is not included in the national debt. If believe the numbers, either taxes need to go up or benefits must be reduced.

The early recipients of social security received much more than they paid into the system. When there was a huge number of works for every retiree, there was no problem with this model. However, the population is aging and fewer workers support each retiree. The excess paid to early recipients will catch up with us, and somebody has to pay in reduced benefits or increased taxes.

Under GAAP standards, the obligations of the federal government are several times the official national debt. While I'm not in the business of predicting a collapse, I have to wonder who is going to buy the bonds of such a leveraged country going forward.

A Problem Made For Bankruptcy

2009-04-10T21:08:00.000-07:00

There is a set of laws already in place to deal with GM's bondholders, suppliers, unions, and anybody else who has a claim on the company's assets. The bonds are widely held, there are many suppliers and other obligations. In order to get all of these constituencies to the table, the bankruptcy court is the best way to settle it. The court would follow established precedent and priorities to pay out claims or reorganize the company rather than a popularity contest playing to political concerns. A successful bankruptcy reorganization will result in:

Creditors paid in a fair and equitable settlement in accordance with absolute priority. The ones that will make "sacrifices" will always be the ones with lower claims.
GM going forward with a less burdensome debt enabling the company to compete better with other automakers.

Bankruptcy allows the creditor classes to vote(1/2 in number and 2/3 in amount) on a plan that is binding to all parties, effectively solving the holdout problem. Even if a class holds out, a bankruptcy plan be crammed down.

Chapter 11 was designed to force all the claim holders together and giving nobody what they want. That's what GM needs to move on.

Trillion with a T

2009-03-26T18:34:00.000-07:00

The national debt is increasing at a rate of over $3 billion per day. From the lows of December 18th, the 10-year and 30-year Treasury bills have risen substantially. December was a panic flight to quality that pushed the 30-year yield to 2.55%. It rose to 3.80% as the panic subsided and investors realized the supply of Treasuries in the next several years will be enormous. The Fed stepped in saying it would buy longer term treasuries which brought yields down sharply. This steep fall in yields was not sustained in the next few days. I believe that much of this is due to concern about the future rate of inflation. If the Fed sustains it's buying for too long, it will fuel inflation. China is talking about scaling back its purchases of US Treasuries. I am sure others will not be far behind.

AIG Bonuses

2009-03-20T16:55:00.000-07:00

With the handing out of $165 million worth of bonuses to AIG executives, some are upset. In large part the reaction to this is on pure emotion and the remedy disregards respect for due process. The anger directed at Edward Liddy, the CEO of AIG, is downright absurd. He joined AIG after the disaster in the credit default market, taking a salary of $1 and compensation in equity. If there's no value left in the company, Liddy will not profit.

Only a part of AIG was part of the mess that resulted in a government bailout. AIG lost huge sums of money on credit default swaps that they wrote. Many of AIG's business units are profitable, and there is no reason why the executives that lead those businesses shouldn't receive bonuses. Since AIG is planning to sell some of its business units, it would be very unwise to push their leaders out and sell a business that is in shambles. Such a policy punishes those that had nothing to do with AIG's failures. If we still believe AIG is an investment for the government, this policy destroys the value of the investment.

The bonuses as a percentage of the bailout money received are a very small part of the total. The bonuses in question are $165 million compared to the bailout of at least $90 billion, perhaps more by now. The federal government is running a deficit of $1.7 trillion. Even if the bonuses are completely undeserved, this is no reason to invalidate contracts and throw out the rule of law.

The bill passed by the House to tax the AIG bonuses at 90% is a clear violation of the spirit of the Constitution. I am not a Constitutional scholar by any means, but this is a clear example of a bill of attainder. The text of the bill does not explicitly single out AIG or this group of executives, but the intent is clear from the words that Congressmen use.

"Our message is clear: If you won't give the bonuses back, we will tax them back," Rep. Steve Israel, D-N.Y., said at a Wednesday press conference to announce the legislation.

Taxing these bonuses at 90% reduces us to mob rule.(Should we not consider this confiscation just because they get to keep 10%). The intent of this bill is to:

Punish by taxing at a 90% rate
Single out a specific group of individuals
Impair private contract

My guess is that many of the same people that oppose Guantanamo Bay are in favor of this bill of attainder. Where is the ACLU on this one?

The Biggest Borrower in the History of the Universe

2009-03-10T08:23:00.000-07:00

I suppose it should be no surprise that yields on the treasury bonds are rising again, particularly on the long end of the curve. In the later part of 2008, we saw a panic in every other part of the market and a bubble in Treasuries that seemed to contradict the fundamentals. The US government was the running large deficits over the last few years, and all indications are that they will get even larger. With this massive supply of Treasuries, sooner or later the prices would have to fall as there is not limitless demand for US government's promises to pay.

While a technical default is not conceivable in my mind over the term of the long bond, investors realize that the probability of increasing inflation and the spectre of unfunded social security and healthcare obligations is very real. Even the Chinese might think that there has to be other places to put their dollars.

Banks to Return TARP Funds

2009-03-08T13:11:00.001-07:00

Not all of the banks needed a bailout, and some right now are quite insistent upon returning the TARP funds they received over the last several months. Larger banks like US Bank and Northern Trust as well as smaller ones like Iberia Bank are applying to return TARP funds. It's not just Rick Santelli that is railing against bailout. The more responsible bankers in the world do not want to foot the bill for their less responsible colleagues.

TCF Financial Corp., the Wayzata, Minnesota-based bank that never made a subprime loan and hasn’t lost money since 1995, is asking why it should help clean up the mess made by Wall Street.
“I’m kind of bitter,” said William Cooper, chief executive officer of the 448-branch bank, adding that over the years TCF has invested about $1 billion in the Federal Deposit Insurance Corp.’s fund that guarantees bank deposits. “We pay for the excesses of our competitor over and over again.”
-- Bloomberg

Some of these banks will be able to pay bank the government soon and they can run their business as they see fit in the best interest of the shareholders. After all this crisis is over, it will be very interesting to see what the new banks look like in the services they offer and their underwriting practices.

If the well-managed banks are treated in the same way as the banks with lax standards, what incentive does that leave in the future?

"Mr. President, they'll see everything, they'll see the big board!"

2009-03-05T16:10:00.000-08:00

I use Google Analytics to acquire some aggregate information on my site. I have seen an increase in page views over the last couple weeks, which is certainly encouraging. However, the bounce rates are very high suggesting that people don't actually read my site much. The more optimistic assumption would be that they are promptly adding it to their RSS reader, which would not be tracked properly by Google Analytics. Thank you for reading my site. I will have more content posted this weekend.

Markets at Work

2009-03-04T07:59:00.000-08:00

In some cases, the principal on loans is already being reduced by players in the market without government assistance or encouragement. For sure, there are many scams out there claiming to reduce payments and principal, but there are some legitimate negotiations taking place. Hedge funds have bought speculative mortgages and they have approached borrowers in order to make a deal.

This recent article in Bloomberg gives an example of a hedge fund that purchased a mortgage for 60 cents on the market and renegotiated the terms of the loan. The hedge funds have worked proactively to protect their investments.

"Greenberg says she warmed to NAD’s proposal after Hussion explained that the value of the house had fallen well below the amount of the loan, and that it was in the company’s interest to head off a default by reworking mortgages like hers."

A relatively small percentage of "under water" mortgages have been renegotiated so far by the free market. The Obama administration has pledged support for changes in bankruptcy law that would allow judges to "cramdown" and force changes in the terms of mortgages. This idea raises a few questions in my mind

Are there in fact too few reductions of principal taking places in the market? In some cases it might be most efficient to foreclose and sell the house to another investor.
What will the long-term effects of changing bankruptcy law to allow "cramdowns" on mortgages? I suspect higher interest rates and worse terms for home buyers in the future.
What changes in regulation could make the market-based renegotiation of mortages more efficient?

Shared Appreciation Mortgages

2009-02-22T21:01:00.000-08:00

Realistically, some lenders will see it in their best interest to reduce the principal of outstanding mortgages. The transaction costs of foreclosing on a home and the value lost is a huge. However, reducing the principal and interest of some outstanding mortgages is an incomplete solution. It is only fair that if lenders write down principal that they participate in the upside when the house is ultimately sold. There is already a way to do this very thing, but some tax regulation stands in the way.

This keeps the loan alive, the family in their home and the property occupied and maintained. Unfortunately, the IRS can’t make up its mind whether such a transaction is an equity investment or a debt instrument, so it has created a vast body of rules before such a mortgage can be created, making the transaction costs so high that a SAM is feasible only for large commercial transactions.
-- Seeking Alpha, "Regulatory Reform: Change We Can Believe In," 2/20/09

New rules and regulations that are likely to come will try to regulate for the last crisis. It will do nothing to prevent a future crisis, and they may reduce the flexibility to avert a crisis or innovate. The greatest supporters of change seem unwilling to allow prices to change too much on certain assets, permit ownership of real estate to shift to other investors, or make individuals to accept the consequences of their over investment in real estate.

Keeping People in Their Homes

2009-02-22T12:25:00.000-08:00

I am skeptical of plans to "keep people in their homes" by government action. First, I take issue that they were in any meaningful sense, theirs at all. In many cases, real estate was bought with little or no down payment. Sometimes interest only or negative amortization(the loan balance grows in the first years of the loan) and no equity was created for the "owner." Even when a more traditional payment structure was used, the first years of the loan accumulate very little equity in any case. The lender in many cases was always the full equity owner of the property, the "homeowner" was merely renting anyway.

Over the last year and a half, home prices have fallen nationwide and particular in California, parts of the Southwest, and South Florida. In Phoenix, the median home price is $150,000, while in recent years the median in Phoenix was $262,000. With these numbers, there is a huge percentage that have no equity in their home at all. Their option to walk away from the mortgage is valuable at this point. Due to a rising unemployment rate and many people already overextended on their mortgages people are unable or unwilling to make the payments and they are being foreclosed upon.

Inefficiencies and problems of foreclosure

Damage to property or poor maintenance due to an imminent forclosure (similar to an agency problem)
Transaction costs for selling a distressed property
Quickly changing neighborhoods and school systems.

Efficiencies of Foreclosure

By letting homes be foreclosed and prices fall, lets prices be set closer to where it makes economic sense, arguably
The homes won't go unused for too long. As long as prices are flexible, they will keep falling until someone buys the inventory. There are two sides to this. Someone is losing their home, but somebody else gains a home at a price compared to their income that is reasonable or an investor buys a property to rent to a "working American."

In many areas of the country, the multiple of home price to income was at astronomical levels. Even with prices down, in many places housing is still expensive relative to median incomes.

"After soaring during this decade's housing bubble, home prices recently fell back in line with what people earn -- and then kept falling." -- LA Times

Some people will benefit from this fall in prices and buy more housing.

Politicians and the media lament about falling home prices or rising gas prices. There is always a temptation to say that this price is too high or that price is too long. The response by some is "there ought to be a law." Surely, it does cause disruptions to some people, but for others they get much more affordable housing. Propping up the housing market prevents everyone from knowing what real estate is actually worth, blocking the signaling mechanism of a capitalist society.

What Happened to Lending

2009-02-21T19:28:00.000-08:00

In the popular press and in everyday conversation we hear that banks that received TARP money are not lending. As usual, there is a grain of truth to this statement. According to Bloomberg,

"Fifty-one lenders who got TARP money reduced total loans by $92.9 billion, or 2.5 percent, in the fourth quarter from the prior quarter...Their smaller peers who didn’t apply for capital or declined cash infusions curtailed lending by $1.87 billion, or 1.3 percent. "

Some people have the impression that these banks are doing no lending or that they have sharply curtailed lending. Of course, lending is down. There is a lack of demand from credit worthy applicants and standards have undoubtedly risen. A Sandler O’Neill & Partners analyst, Kevin Fitzsimmons, recently said, “I think everyone’s standards have increased, so you’re looking tighter at a loan application and probably rejecting more than you used to.” I suppose we could go back to lending to anyone and everyone in absurd amounts, but that would just be going back to the cause of the crisis in the first place. We cannot look at 2005 and 2006 as the standard of normalcy in lending. Even throughout the 1990s there was a huge increase in credit. Who is to say what is normal?

Many will have anecdotal evidence that banks have sharply curtailed lending, but it does not stand up to reality. The Treasury department recently stated, "In sum, loan activity was resilient in the face of the worst economic downturn in decades."

2009-02-13T19:37:00.000-08:00

"An international mathematics research team announced today that they had discovered a new integer that surpasses any previously known value "by a totally mindblowing shitload." Project director Yujin Xiao of Stanford University said the theoretical number, dubbed a "stimulus," could lead to breakthroughs in fields as diverse as astrophysics, quantum mechanics, and Chicago asphalt contracting."
http://iowahawk.typepad.com/iowahawk/2009/02/numbers-in-the-news.html

Maybe we do really need funds to research bear DNA. Certainly, some bridges to nowhere will help. I think we can all agree on that. This bill is so big that it is really is incomprehensible.

"There are 1011 stars in the galaxy. That used to be a huge number. But it's only a hundred billion. It's less than the national deficit! We used to call them astronomical numbers. Now we should call them economical numbers." - Richard Feynman, US educator & physicist (1918 -
1988)

I have serious doubts that borrowing hundreds of billions of dollars to spend is a good idea. I really don't think the Congress or Senate has any idea what investments have a positive net present value. Even if they do know, there is a temptation to get as much as possible for your district whether or not it makes sense economically. This stimulus bill was sold as a way to modernize infrastructure while putting people to work. This is a dubious reason at best, jobs are a cost. Labor is like a machine or raw material in the production process. Using that input takes it out of the economy and from another productive use. Opportunity cost, opportunity cost, opportunity cost. Parts of this bill are entitlements, which probably have no realistic end in sight. So, much of this stimulus may not be reigned in when it outlives its usefulness.

"Government programs, once launched, never disappear. Actually, a government bureau is the nearest thing to eternal life we'll ever see on this earth! " -- Ronald Reagan

Take some time to watch this speech or read the text of it.

Some skepticism about infrastructure spending

2009-01-21T07:40:00.000-08:00

Massive infrastructure projects are being sold by the administration as a way to provide jobs in the short-term and invest for the long-term economic growth of this country. With so much money being spent at once and a belief by many that the current government will make the right decisions, we are setting ourselves up for a "lost decade."

In 1990, Japan's "bubble economy" collapsed. Like our recent economic troubles, it started in real estate. Japan's case was much more extreme in degree. In the Ginza district of Tokyo, some property went for $139,000 per square foot in 1990. Japan propped up existing banks, and banks did not recognize defaulted loans. They created "zombie banks" propped up year after year by the government and pretended they were solvent.

Japan's fiscal policy was to spend on massive public works projects to keep people employed. Airports with no airliners wanting to fly there, concrete tetrapods to prevent beach erosion that actually do the opposite, roads and bridges to nowhere, and countless other projects that did not bring Japan back to prosperity.

Creative destruction was not allowed to work in Japan. Older firms that were no longer productive were propped up by banks, and Japan's economy was frozen. To show for itself, Japan has the highest national debt as a precentage of GDP in the industrialized world, 170%. To think that it can't happen here is to disregard the record of inefficiency and contradictions of the US government and governments in general.

Stimulus Package

2009-01-16T10:33:00.000-08:00

"The way I see it, the first job of my administration is to put people back to work and get our economy moving again." -- Barack Obama, 1/16/09

Voters and consequently politicians have among other biases, a make-work bias. This make-work bias misses the point of a job and how the economy works.
"The Dallas Fed economist W. Michael Cox and the journalist Richard Alm illustrate this process in their 1999 book Myths of Rich and Poor, citing history’s most striking example, the drastic decline in agricultural employment: “In 1800, it took nearly 95 of every 100 Americans to feed the country. In 1900, it took 40. Today, it takes just 3.…The workers no longer needed on farms have been put to use providing new homes, furniture, clothing, computers, pharmaceuticals, appliances, medical assistance, movies, financial advice, video games, gourmet meals, and an almost dizzying array of other goods and services.”

Since I am not an anarchist, I believe there should be some government jobs and government spending. If we are looking at the government to help create or save job, we need to look ask

Is this an public good that will not be produced by the market? A public park or a lighthouse is the stereotypical example. There is not a practical way to restrict access to the benefits and bill for the use of a public good.
If government is to provide the good or service, will it be at least as efficient as contracting it out to private enterprises?
Does the benefit outweigh the costs? You need to count jobs as a cost not as a benefit. Labor should be counted as a cost like a machine, raw material, or land.
Apart from economics, is this a constitutionally allowable activity for the Federal government?

As a practical matter with this most recent stimulus package, I have a trouble believing that this money will be well-spent. I do not believe that politicians will evaluate projects properly. There is far too much emphasis on job creation. They really need to focus on the net present value complete with opportunity costs for all the inputs. With so much money being thrown at projects, how selective will they be? I suspect we will get projects of dubious economic benefit. Ethanol, synfuels, bridges to nowhere

Senate Valuation

2008-12-10T11:05:00.001-08:00

Somebody beat me to it.
http://www.clubforgrowth.org/2008/12/how_much_does_a_senate_seat_co.php

Workers of the World Unite!

2008-12-10T06:42:00.001-08:00

If you didn't know, workers at the Republic Window & Door factory have occupied company property for several days. The news coverage and the facebook groups paint the workers as oppressed by their bosses, banks, or whatever. I have not seen a full financial statement, but it is pretty clear that sales have fallen. The bosses are being blamed, but it looks like that's not the case.

Referring the the person who bought the company in 2006,

“Despite inheriting a company bloated with overhead and lacking any type of manufacturing discipline and/or productivity, the company made significant improvements only to encounter an unprecedented decline in new-home construction." Bloomberg

"Republic’s sales tumbled to $40.3 million this year from $52.3 million in 2007 as orders from homebuilders dropped to $6.3 million from $17.9 million, the company said in a statement." --Bloomberg

I wonder if the workers have really looked over all their options. If they really think the company can work, have they tried making an offer to buy the company? Financing through banks would be difficult for sure, but they clearly have many supporters giving them donations and volunteering. What if these supporters made a loan package available for them to do a leveraged buyout of the company? The Union probably has some money as well to inject in a buyout. Since I haven't seen a financial statement, I can't give you an estimate for the valuation, but if I see any I will post a valuation.

Credit Defaults Swaps on Treasuries, McDonalds, and Britain

2008-12-09T22:48:00.001-08:00

"Last week, the cost of insuring against a US default via credit derivatives hit record levels. Yesterday, London dealers were quoting between 23 and 28 basis points meaning it costs €23,000 ($33,600) to €28,000 a year to insure €10m in bonds. But the quotes for McDonalds were about 25bp-26bp."
Financial Times 9/27/08

A more recent story from IHT.
"The cost of insuring U.S. government debt against default over a 10-year span is a record $55,000 a year for $10 million worth of U.S. Treasury securities, or 55 basis points, as the cost is commonly expressed. That is a fraction of the 4,000 basis points for an emerging market country like Argentina, where some investors fear a default could happen as early as next year."

"in Britain, the swaps rose to a record 104 basis points for 10-year debt."..."The implied risk of holding debt issued by McDonald's was 67 basis points for 10-year securities on Tuesday"

Even with a perceived increasing risk of default, the prices for Treasuries and the rates are still falling. Right now the 10 year Treasury is just above 2.50% and the 3 month has a yield very close to zero. Since an active market in credit default swaps is relatively new, we don't have any much experience with seeing a situation where credit default swap prices are rising and yields on the underlying are falling. But seriously is Britain more likely to default on its Sterling obligations than McDonalds?

A US Senate Seat, Priceless

2008-12-09T15:27:00.000-08:00

In exchange for the Senate appointment, Blagojevich allegedly discussed obtaining:

• A substantial salary for himself at a either a non-profit foundation or an organization affiliated with labor unions.

• Placing his wife on paid corporate boards where he speculated she might garner as much as $150,000 a year.

• Promises of campaign funds — including cash up front.

• A cabinet post or ambassadorship for himself.

--Chicago Sun Times

"I've got this thing and it's f***ing golden, and, uh, uh, I'm just not giving it up for f***in' nothing. I'm not gonna do it. And I can always use it. I can parachute me there."

--Rod Blagojevich

What does it usually cost?

Blagojevich was offering a bargain on something he didn't own in the first place.

When I have time, a valuation for a US Senate seat sounds like a fun project.

Made sense at the time

2008-12-08T09:32:00.000-08:00

Tribune is in talks to prepare a potential bankruptcy filing. All the newspaper publishers are in trouble. After Sam Zell's acquisition of the paper and the piling on of $12 billion in debt, the company has been on shaky ground. The most immediate issue is the breach of a covenant keeping debt to 9x adjusted earnings. Typically, concessions can be granted. In Tribune's case the covenants are already very loose.

I guess now is the time to ask what were they thinking. Levering up a company that much to begin with is shaky. When it is in an industry that is in decline, even more so. Few newspapers have shown that they can make substantial revenue online, and paper sales have been falling. So many of these deals seem like they would only work in the best of circumstances, and really we should have seen this coming.

http://online.wsj.com/article/SB122868944355686385.html?mod=rss_whats_news_us_business

An Option to Buy Insurance

2008-12-03T08:34:00.000-08:00

An option to buy insurance

An interesting concept. Most of the time you don't need insurance. Most of the time it is easier just to pay the doctor in cash and not worry about claim forms. Other than the tax advantage, why should you fill out forms and have a third party payer for routine medical care. We do not fill out forms, show a food insurance card, and have a third party write the check at the grocery store. Insurance should protect against low probability, catastrophic risks in the tail of the distribution. When you really need insurance with this concept, you can acquire it.

The Great Wall

2008-12-01T19:37:00.000-08:00

"President Barack Obama will soon have to make a judgment to reform the nation's "wall" if he is, as he so often says, to build a more perfect union. The wall I refer to is the U. S. Constitution."

http://www.huffingtonpost.com/rep-jesse-jackson-jr/building-a-new-wall-the-f_b_146606.html

In a way, Jesse Jackson is correct in calling the U.S. Constitution a "wall." The purpose of the Constitution was and still is to prevent tyranny. The Bill of Rights contains the phrases "shall not" several times when referring to actions of the State and several other clauses restrain the State's actions by requiring due process. It is clear the Constitution and the Bill of Rights is intended to be a limitation on government, which is a wise decision.

We should not throw out this idea that government should have limitations. Even if a particular initiative is very popular, we must still consider whether the majority has a right to enforce the particular mandate on the minority. Too often people are wrapped up in whether a law helps a certain group of people or feels good and not whether it conforms to the principles of a free society, however interpreted.

Supply and Demand

2008-11-11T09:24:00.000-08:00

Take a look on craigslist at the Northern Virginia and DC area housing section. You'll notice that many people have put up their house or apartment for a few nights around the inauguration. No central planner told them to rent out their home for a day or two. Regular people saw an opportunity for profit from the increased demand that hotels could not satisfy. The markets work like this everyday for almost anything you buy. If we outlawed "price gouging" this new supply of rooms would not be available, and a visiting family might decide to buy two rooms instead of one. Supply and demand at work. Laws against "price gouging" would not change how visitors to the inauguration value a room near DC. However, such a law would block the signal, and the price of a room would bear little relation to how people value it. With no restrictions on pricing, the supply increases, more people get what they want, and those that place a high value on a room can get one. Prices serve as signals every single day, and if policy blocks those signals there are clear repercussions. So, when you want the government to set prices for something, think about this example of a market at work.

Limited Government

2008-11-06T11:07:00.000-08:00

One of the most essential features of the Constitution is that it sharply limits the power of the Federal government. It is clear from the Constitution and the contemporary writings of the Founders that a Congress with plenary powers was not intended.

Government has moved from an independent body to prevent rights from being violated toward anything a majority says it is. While the Constitution has some room for interpretation, the wild interpretations of the Commerce Clause seem a bit much. The Interstate Commerce Clause allows the federal government to regulate commerce between the several states. The justifications given for many regulations follow from the Commerce Clause. The powers of the federal government as traditionally understood to regulate interstate commerce centered around prevention of states erecting trade barriers with other states. A second interpretation says that the federal government can place regulations on interstate commerce. A railroad that travels between several states or goods that are transported across state lines could be regulated. Up until the 1930s, these interpretations were the rule.

It gets complicated when the federal government tries to regulate things that are not interstate commerce at all. With the National Labor Relations Board v. Jones & Laughlin Steel Corporation decision the power of the federal government under the commerce clause greatly increased. After several decisions in the late 1930s and early 1940s, the commerce clause could be interpreted for almost any regulation desired.

Some recent decisions of the 1990s and early 2000s give reason for hope. United States v. Lopez (1995) challenged the Gun Free Schools Act of 1990. Lopez's defense said that the federal government did not have a right to regulate firearms in school zones. Therefore, the law was unconstitutional. The Court held "A law prohibiting guns near schools is a criminal statute that does not relate to commerce or any sort of economic activity." This case was the first one since the Great Depression to limit the power of Congress under the Commerce Clause.

If you think that the Commerce Clause can be interpreted to mean all things to all people then why was it even included. If you want to have the federal government step beyond its Constitutional limitations then amend the Constitution. Otherwise, we should just shred it as another meaningless document.

The Truth About Regulation and the Financial Crisis

2008-11-05T19:05:00.000-08:00

I was trying to start an argument about the financial crisis. A person I know on the far left blamed deregulation. She has next to no knowledge of financial markets, and she is simply wrong on the record of deregulation under Bush. Without evidence she assumes two things:

Substantial deregulation of financial markets took place under Bush
This deregulation in large part caused the current financial crisis

I recently found a prescient article from the Wall Street Journal dated November 11, 2003.

Mr. Mankiw did taxpayers a service by wading into the debate over how to monitor these companies that have become repositories of enormous financial risk. Fannie in particular has marshaled its political troops to stop a bill in Congress that would transfer its regulation to the Treasury Department from a feckless unit of HUD. Fannie prefers feckless.

Specifically, "the subsidy creates a source of systemic risk for our financial system." This is because "the subsidy has allowed" the companies "to become gigantic," with their debt more than tripling to $2.2 trillion from 1995 to 2002."

Oh, but it gets better. "But especially notable is the support for Fannie and Freddie from liberals who normally detest corporate welfare. In this case, Congressman Barney Frank criticized Mr. Mankiw because he is worried about the tiny little matter of safety and soundness rather than "concern about housing."

Link to the article

For a problem as complicated as the financial crisis, it is not likely to be the only major cause. Looking at the evidence we see evidence that regulation was actually increased on Wall Street. The deregulation that did happen in the recent past probably prevented even worse consequences. One, Sarbanes-Oxley substantially increased the regulatory burden on companies. Under SarbOx, companies must mark certain assets to market. Even performing assets have been marked down substantially by banks. Since many of these assets are illiquid and difficult to value, they are often marked to a model rather than an actual market price(since a market price does not exist). Two, a substantial deregulation, the Gramm-Leech-Bliley Financial Services Modernization Act, enacted in 1999 under Clinton probably helped prevent an even worse disaster. This act repealed substantial parts of Glass-Steagall, and it allowed commercial banks and investment banks to combine. The universal banks have fared better in the recent crisis. I have a few more comments and links on another post.

I don't expect everyone to be an expert on regulation of financial markets. I certainly am not one myself. However, I do expect someone to actually have some facts about a situation before they argue a position. Remember, "Everyone is entitled to his own opinion, but not to his own fact"

I will continue to research this issue, and keep my readers updated.

Health Care Coverage

2008-11-05T10:12:00.000-08:00

The spectrum of health care systems

No government involvement in health care - All hospitals are privately owned and all health insurance is privately underwritten. In the most extreme case, doctors and hospitals would not be licensed by a government agency. Treatments and pharmaceuticals would be unregulated by the government. The only regulations that would apply to health care would be laws that apply to all other industries such as laws against fraud.

Regulation of practice and treatment - Doctors and hospitals must meet certain minimum standards set by a state or federal government. In the case of minimal regulation, harmful or useless pharmaceuticals and treatments are not allowed to be sold. Warning labels for some medications or treatments may be required by the government. Regulations for pharmaceuticals could range from minimal standards to extensive testing for efficacy on a certain condition.

Regulation of prices - Pharmaceuticals, treatments, or pay for doctors may be regulated by the government in order to keep prices down.

Regulations of private insurance markets - Mandates for coverage of certain conditions and perhaps requirements for deductibles. Rates or underwriting practices may be regulated by the state or federal government. In an extreme case, underwriting is basically outlawed with guaranteed insurance laws and community rating. The insurance may be mandatory, provided by employer, or freely purchased by individuals.

Government payment for medical care - In one way or another the government sets up an insurance program. These programs could range from coverage for specific groups or for an entire population.

Government provision of health care - A state agency owns and operates hospitals. With today's current system, some hospitals are government owned such as VA hospitals or county hospitals. In the British National Health Service, the government owns the hospitals and general practitioners contract with the National Health Service.

The US has a little bit of all of these systems to one degree or another.

I will post some information on other health care systems around the world shortly.

A Flawed Analogy

2008-11-03T19:52:00.000-08:00

For those that know me well, I often venture into political conversations at bars, on the quad, and over dinner. This blog has intentionally stayed away from politics for the most part and focused on economics and finance. Typically I have addressed current financial issues and perennial economic fallacies. That said, this entry is more political in nature.

"I think when you spread the wealth around it's good for everyone." -- Barack Obama
Ok, if you're spreading the wealth around it's not good for the person having their wealth spread around. (People who pay taxes)

"I don't know what's next. By the end of the week, he'll be accusing me of being a secret communist because I shared my toys in kindergarten. I shared my peanut butter and jelly sandwich." -- Barack Obama

Nobody would accuse Obama of being a secret communist for sharing his own stuff. He wants to force you and I to "share" our stuff. Of course, it's not really sharing at all if the government locks you up if you don't share your stuff.

That is all for now.

VIX Rises Above 70

2008-10-10T10:16:00.000-07:00

The volatility index has sharply risen today to 72.85 the last time I checked.
http://blogs.wsj.com/marketbeat/2008/10/10/the-soaring-vix/

We have gone from the VIX being at 10 in early 2007. Basically, the market didn't see risk anywhere. Now, under every rock and behind every door is more risk. Every major central bank and government is trying to fix this mess.

http://www.businessweek.com/investing/insights/blog/archives/2008/10/the_vix_could_t.html
Is it a bottom?

The decoupling of financial and real markets across the world was a myth. Every stock market that I can think of has fallen in the last couple weeks. Germany, Russia, Brazil, India, Iceland.
The real economies of emerging markets are still growing, but it is clear that they are slowing resulting in downward pressure on oil prices. Yet for some reason US Dollars and Treasuries are still in demand. Dare I say it, the long-term fundamentals of the United States are still good.

The Bailout

2008-09-29T17:29:00.000-07:00

The bailout measure failed the House 228-205 and the Fed has continued to provide short-term loans to banks. Most people don't understand what is meant by a bailout and what exactly is being bailed.

The Numbers - Hank Paulson, Secretary of the Treasury, is asking for $700 billion. It would start with $250 billion with the rest subject to Congressional veto. $700 billion is about 5% of the gross domestic product.

What would they spend the money on - Mortgage-backed securities and Collateralized Debt Obligations

Mortgage Backed Securities - Cash flows paid out of principal and interest from mortgages. The buyers of these securities need to look at interest rate risk, prepayment risk, and default risk. They also need to look at the value of the underlying collateral in the event of a default in order to value these securities.
Collateralized Debt Obligations - A special purpose entity created to buy fixed income assets(other structured securities, mortgages, bonds, loans). They are sliced up and sold to investors in tranches. The senior tranche receives payments first, followed by mezzanine, subordinate, and equity tranches. So, if the underlying asset does not pay off, investors in the equity tranche lose first.

Why? - Bank balance sheets are filled with mortgage backed securities and CDOs that there is not much of a market for right now. The credit markets have tightened and banks are not willing to lend money.

What does it all mean? - Estimates of the actual cost of a bailout have varied. The securities that the government buys are probably worth more than zero. Some even say that the Treasury will make a profit on this deal like in the Mexican bailout. Some have asked where the government will get the money for this scheme. It will get money from where it always does: taxing, borrowing, or printing. At least right now, it is in a good position to borrow with treasury bond rates at very low levels. The Treasury can borrow at these low rates and buy these more illiquid securities, behaving like a very large hedge fund. Albeit, a hedge fund with other motives than return on investment.

If you have any questions about this situation or if you think I should cover more in this entry, post a comment or send me an email.

Paulson

2008-09-25T10:14:00.000-07:00

Gramm-Leach-Bliley

2008-09-19T11:15:00.000-07:00

I have been saying it throughout this crisis that the repeal of Glass-Steagall, the Gramm-Leach-Bliley Act, passed in 1998 was not responsible for the troubles in housing or the banks. In fact, we see that the strongest financial institutions are those that follow a universal banking model.

Two links to Marginal Revolution

Glass Steagall: The Real History
Did the Gramm-Leach-Bliley Act cause the housing bubble?

The Great Depression brought about much financial regulation. Let us not make the mistake of hastily enacting new regulations just to be doing something. Remember the windfall profits taxes on oil companies in 1980, Nixon's wage and price controls, industry-wide cartels of the 1930s... You could fill volumes with examples of bad or ineffectual regulations that followed because people wanted to do something.

Credit Default Swap in a few lines

2008-09-18T07:39:00.002-07:00

Not everybody knows about credit default swaps. Basically, let's say A issues a bond. That bond is traded in the open market. B can write a contract to C that says "I will pay if A does not pay(defaults)." If A defaults, B would have to pay C. Typically, the amount is the value of the CDS contract minus the recovery rate(how much is received from selling the company's assets).

So why should you care? There is an outstanding notional value of $65 trillion dollars of CDS contracts.

Quote of the day

2008-09-18T07:39:00.001-07:00

"Let me issue and control a nation's money and I care not who writes the laws."
-- Mayer Amschel Rothschild

More true today than ever.

Who, What, Where, Why, How?!?!?!?!?

2008-09-18T07:39:00.000-07:00

Still watching the bond market here.

Take a look at this treasury yield curve The 3 month rate is basically 0. The real rate is negative.
I'm not quite sure why you should buy treasury bonds right now. Basically, you are paying the government for the privilege of lending them money. Flight to safety seems overdone now, but where oh where to go? More at 11.

The LIBOR / 3 month treasury spread is up up up

Yes, it really is that bad -- Worst Crisis Since 30s

Are we there yet?

2008-09-17T09:25:00.000-07:00

Another bailout on the way

The case for a bailout of the auto industry is weak.

What to say

2008-09-17T06:56:00.001-07:00

Lehman had its long slow, descent into bankruptcy. It makes you wonder why Bear and not Lehman. Part of it is that Bear failed first. The other is that Lehman's troubles were relatively well known for months and the market had time to absorb the news. If anybody else some better ideas, please comment.

We are seeing the 3 month treasury bond yield at near zero.
When the government can borrow for nearly free and a nominal basis and a negative real interest rate, it's not a good sign. You cannot help but think of Japan when you see the rates this low. There are some parallels, but the actions taken recently have been different than Japan in the 1990s. In Japan, bad banks were propped up by the government. At least the bailouts here seem to be designed so that the common stock holders do not receive much. I believe the goal of the recent bailouts is different than the bailouts in Japan. I hope the goal here is to assist an orderly liquidation of assets rather than to protect the older and established companies and to keep up appearances.

AIG received an $85 billion loan from the Fed in return for 80% of the equity. The Fed now has control over AIG. The effects of this are being felt by the financial markets today.
"Banks abruptly stopped lending to each other or charged exorbitantly high rates Tuesday, threatening to spread the troubles of American International Group Inc. and Lehman Brothers Holdings Inc. to a broad range of financial institutions and the global economy."

"The depth of the money-market problems became clear at lunchtime in London, when the British Bankers' Association published Tuesday's Libor borrowing costs. Every day, 16 banks report what it would cost them to borrow at certain maturities and currencies. Overnight dollar Libor soared to 6.4375% from 3.10625%, the largest jump on record. Three-month dollar Libor rose to 2.876% from 2.816%."

If you are relatively informed on the recent events, I'd enjoy having a conversation about it to see what you think.

Links

2008-09-05T15:06:00.000-07:00

A few links

I thought this post was quite interesting on valuing oil reserves. It talks about the real options and how NPV would undervalue oil reserves substantially.
http://www.marginalrevolution.com/marginalrevolution/2008/09/hail-giacomo-po.html

Hedge funds to the rescue
http://dealbook.blogs.nytimes.com/2008/08/27/hedge-funds-sprout-in-gaps-in-real-estate-lending/

Nanosolar raises $300 million
http://www.mercurynews.com/breakingnews/ci_10316469

A Few Observations on Financial Markets

2008-09-05T09:21:00.000-07:00

These observations are nothing new.

Liquidity is not there when you most need it - In good times, there is liquidity for most people. Unless you are a giant player in the market, most of the time you can buy and sell without affecting the price much. You more or less know what something you own is worth. In times of poor liquidity, you have no idea what something is worth. When you are subject to regulatory requirements like banks or use high levels of leverage, you sell what you can sell as quickly as you can sell it.

Models are always wrong when they most need to be right - Models do not hold up under times of market stress. Maybe it is getting better, but knowledgeable people like Alan Greenspan basically say economic models are not any better than they were years ago. These models do not have much predictive power for the correlations between returns in situations of market stress. Remember that LTCM should have never lost so much money as it did in the history of the universe.

Similar things happen, but different enough where we don't know how to correct it in the future - All regulation tries to fix the last crisis in the markets. We never really know if a regulator was correct, but we know when they were wrong. We can never know the cost of lost opportunities due to excessive regulation and it is impossible for government to keep up with the dynamic free market. About every ten years, there is some new disruption in the market. Commodities in the late 1970s and early 1980s, leveraged buyouts in the late 1980s and early 1990s, Dot-com stocks in the late 1990s, and credit right now(also commodities and housing). Ultimately, we need creative destruction and it must be allowed to take its course rather than protecting everyone who lost money or might lose money.

Valuations come back to reality, but sometimes it takes longer than you can stand - Whether it is Dutch Tulips, Beanie Babies, or Internet stocks valuations will reflect fundamentals eventually. It is a question of when. Keynes said, "the market can stay irrational longer than you can stay solvent." Ask anyone who shorted Internet stocks in 1999. Within a bubble, many people know the prices do not make sense. They hope to make a profit according to the "greater fool theory" and get out before the prices fall back to reality. Not all bubbles could mean higher prices. The extremely low oil prices of the late 1990s did not seem to reflect the rising cost of exploration and production and the lack of new discoveries amid growing demand for oil.

I may develop these points in further blog entries with better examples and analysis, but this is a start.

USPS

2008-08-26T14:40:00.000-07:00

Some time ago I got on the topic of the United States Postal Service with a liberal(American liberal). I argued that we do not need a postal service owned and operated by he government and I felt the arguments in favor of one were weak. The argument for the USPS as a government agency hinged on the idea of universal service. Basically, should a person pay the same rate to send a letter from Wyoming to Alaska as someone pays to send a letter from NYC to Chicago or from Queens to Manhattan. It probably should be more more expensive for the low traffic route from Wyoming to Alaska. I have no idea what the magnitude of this difference would be and the type of service that rural postal users would receive in a completely privatized system though. 'Fairness' is not an issue. Some goods and services simply cost more in the different parts of the country. Real estate, parking, food, or almost anything costs substantially more in New York City than in rural Illinois and there is nothing wrong with that at all. Subsidizing services in rural areas does not make it more fair. More equal yes, but if it cost structure is different prices and services should be allowed to reflect those differences.

So, why should government control the postal system? (it is allowed by the Constitution, but it is not an obligation of the government) FedEx and UPS have shown how private companies can effectively deliver practices and urgent mail. This competition has made the USPS better and more responsive. Why not end the monopoly on 1st class mail and bulk rate mail? This idea sounds radical to many, but there is no reason why it should be radical at all.

Repeat this for the Universal Service Fee on your telephone bill.

Stay Tuned

2008-08-26T07:08:00.001-07:00

I have a few more entries in the works that I am in the process of editing and getting ready for publication on this blog.

On Ideology

2008-08-24T12:48:00.000-07:00

White sitting around talking politics, I received the impression that some reject ideologies as such. For sure, no ideology is perfect, but that misses the point. An ideology models society and the people within a society. We need a model to comprehend the complexities of society. The hard sciences like physics can test their models in controlled conditions repeatedly. We know that the theory of general relativity is a good model as it has held up to countless tests and predict phenomenon in many situations. It is not perfect, but physicists are not about to throw away something that works in favor of nothing at all. we cannot experiment so rigorously with societies, so we have to study history and human nature.

For those who dismiss ideology all together, you are traveling without a map or direction. Usually whether one admits it or not, some sort of implicit ideology guides their voting and policy preferences. People have some approximation of the scope and role of government in society implied in their statements. John F. Kennedy said,
"What is at stake in our economic decisions today is not some grand warfare of rival ideologies which will sweep the country with passion but the practical management of a modern economy. What we need are not labels and cliche's but more basic discussion of the sophisticated and technical questions involved in keeping a great economic machinery moving ahead."

This assumes that the economy can be managed like a machine. Actual policy would embody even more ideology since it would endorse ends for the economy whether it's higher growth, a better environment, or more equality. Casually, people will say that he government needs to do x, or that y is none of the government's business. While most do not make their assumptions explicit, more people should in order to better comprehend a complex society.

Why is ideology rejected as such

People have seen too many ideologies applied that do not fit society or human nature and cause much damage
Exceptions to the rule are dealt with first and the whole package is discarded if it does not fit in every single case.
People do not know what ideologies are out there and why they exist

Just making you think,

Drew

Some interesting stuff

2008-08-14T14:00:00.000-07:00

Venture Capital Rating and Bashing (story about TheFunded.com)

VC Firm Subpoenas TheFunded.com
I suppose people we'll sue over anything. Although some VC firms may find that the truth hurts them more than it hurts TheFunded.com and its now anonymous posters.

Saakashvili: Russia controls a third of Georgia
So, what are Russia's intentions here? I should do a post about Russia. It would probably turn into a very anti-Russian rant though.

Bank analyst forecast Georgian Crisis Two Days Early

That is all for now

Famous Last Words

2008-08-14T13:43:00.000-07:00

So often it seems an executive or government official says there is no crisis or utters some "famous last words" before everything collapses. I am sure there are countless examples. If my readers have some examples leave them in the comments.

Great Depression - Many people including President Hoover said things like "Recovery is right around the corner." With better policies, it might have been, but that's a topic for a different post.

Bear Stearns - Tells investors that two of their hedge funds lost all of their value in July 2007.

CEO Jimmy Cayne says, “Most of our businesses are beginning to rebound." - October 2007

President Alan Schwartz - “We don’t see any pressure on our liquidity, let alone a liquidity crisis.
"We are in constant dialogue with all the major dealers, and I have not been made aware of anybody not taking our credit. None of that speculation is true.” March 10, 2007

Receives a bailout from the Federal Reserve and JP Morgan March 14, 2007

Uno Pizza Grill
The pizza chain, Uno, is in serious financial trouble. They have a $7.1M interest payment due on August 15, 2008. Despite their talk otherwise, they may not even know where the money is coming from the pay the interest and certainly even less so on the next payment. They are facing the possibility of a downgrade of their bonds to D.
Psallidas(CFO) - "We have a productive active dialogue going on with our bondholders"
Read the news stories on Bloomberg.

So readers, if you have any other good examples of 'famous last words' post away.

Leaky Buckets and Doing Good With Other People's Money

2008-08-09T19:31:00.000-07:00

Many people see government as the way to ensure a fair distribution of wealth, basically by taxing the wealthy and giving something to the poor whether it is cash transfers or aid in-kind. Right now, I won't address the moral considerations or the problems of interpersonal utility comparisons. I will address some of the inefficiencies stemming from incentives and administrative costs.

First, you need to acquire the resources by taxing from someone who makes a higher income(or wealth) to give it to someone with a lower income(or wealth). An income tax creates a disincentive for producing and the capital gains tax reduces incentives for investing. Both result in a smaller amount of production now and in the future. Just how much is a question for the econometricians.

With a complex tax code like in the United States, incentives are in the tax code to invest in one thing as opposed to another. For example, municipals bonds are tax free at the Federal level and often at the state level. While this keeps rates low for municipalities, it diverts capital away from other uses. In absence of tax incentives for municipal bonds, more corporate bonds may be bought reducing the cost of borrowing for corporations. The price of lost innovation and production is really unknown with just this one example from the tax code. With a political system like ours, the tax system is bound to stay complex. Of course, nobody wants to pay taxes. So, we must have a government agency enforcing the tax code, investigating tax payers, and dispensing penalties. None of this is done for free. While I do not know what productive use an IRS agent would have outside of government, there may be one.

On the other side, welfare programs of all kinds have administrative costs. These programs need to set conditions for who receives payments and enforce that the truly deserving and needy get these benefits. None of this comes for free. As a parallel to the taxation side, the disincentives of welfare function in similar ways. Somebody who receives benefits knows that their benefits will be reduced if they work more. For some the psychological benefit of working and producing outweighs this loss of handouts. However, at the margins it can have an effect.

We have seen that transferring from the rich to the poor does not come free and this must be taken into account in the structure of tax and welfare systems alike.

Who Owns Big Oil?

2008-08-08T11:39:00.001-07:00

Take a guess at what percentage of the big oil companies is owned by the executives? Now, take a guess at how much is owned by pension and mutual funds? If you guessed that the fat cats owned it all, you would be wrong. 27% is held by pension funds, 14% in individual retirement accounts, and 29.5% are held by mutual funds. Pension funds provide retirement benefits for millions of ordinary workers in the United States. Individual retirement accounts are owned directly by ordinary Americans. Particularly, in the case of individual accounts we are not seeing only a few account for the ownership in oil companies since individual retirement account contributions are sharply limited by IRS tax rules. Many people that you know own shares in oil companies directly or indirectly. Management only holds 1.5% of shares outstanding. (Source) You can look at sites like Yahoo Finance that disclose the major holders in specific companies as well.

When politicians attack big oil and threaten to slap a windfall profits tax on them, they make little sense economically. They also threaten the future of American's investments for their retirement and education. There is pain for millions of people that have difficulty affording high gas prices, but a windfall profits tax is not the solution. If you believe that the oil companies will continue to make high profits, set aside some money to invest in them. Even better if you use a tax advantaged plan like an IRA or 401K.

Secular Bear Market

2008-08-07T13:53:00.000-07:00

If you watch CNBC you see talk of a rally in the markets regularly, but the truth is the market has done basically nothing since 2000 other than stay within a fairly narrow range. You would have been better off keeping your money in treasuries. This has happened before, from 1966 to 1982, real returns on on the S&P 500 were negative. From 1982 to 2000, it was good to stay long since the market was going up dramatically. Is that the best strategy for a secular bear market like this one, 2000-????

I would say that it is not if you want to beat inflation. First, if you are going to invest in the market, remember there is more than one market. The United States is a large country, but it is far from the only market to invest in. Emerging markets such as Brazil and India have seen stellar returns from 2000-2008. Exercise caution when buying into these developing countries though. They can only maintain high levels of growth for so long and their growth is dependent on a fast pace of reforms and opening their economies to outside investment. Your portfolio needs a wide variety of asset classes and countries represented. This secular bear market is likely to persist, the average is 17 years. The idea of secular bear and bull markets raises interesting questions of what causes long term trends in valuation and growth. I suspect much of it is based on changes in technology and industrial organization. I believe that the 1982-2000 boom was largely fed by technology helped in part by economic reforms to open trade and lower taxes. What could cause the next secular bull market? Nanotechnology, advances in space travel, low cost alternative energy, something else

Alternative Energy for Dummies

2008-07-28T20:40:00.000-07:00

Let's take a look at some alternative energy technologies.

Advances have recently been made in solar to bring down the cost to a more reasonable level. Costs for photovoltaics have dropped from $27 per installed peak wattage to $4 per installed peak wattage recently. A company called Nanosolar, funded by the founders of Google, has technology to print solar cells at much lower cost. They claim they will be able to profitably sell them at $1 per installed watt quite soon. This technology could be deployed across large parts of the southwestern United States. This new solar technology combined with better storage and power transport technologies could spur a switch to solar energy.

The price of wind generators has also fallen greatly in the last few decades. Major companies like GE and Siemens as well as dedicated wind generation firms like Vestas. Generator technology is mature technology. However, many improvements have been made in blade design and materials, gearing, and computer controls. Billionaire oilman T. Boone Pickens is currently investing in the world's largest wind farm with over 2,000 turbines. In some areas, prices can rival coal or nuclear. With better storage and grid technologies, wind can provide a large amount of useful energy.

For automobile transport, we'll need either better batteries or some sort of manufactured liquid fuel such as hydrogen. Battery technology is improving quickly, and this means acceptable range and fast charging times with falling prices for batteries. Hydrogen fuel cells for cars do not seem practical in the near future. In addition to a workable battery technology, we need plentiful electricity. For the long-term this will need to be based on a renewable resource such as solar or wind. As for air transport, it's not quite as easy. Batteries do not have anywhere near the power density for air travel. Hydrogen could be manufactured for aircraft use provided there is cheap energy and a way to store it.

Biofuels might solve both the transport and the collection problem. While current technology with corn ethanol is expensive and requires huge inputs of energy, it might be better in the future. There are also a number of other technologies on the horizon. Algae can produce bio diesel and bacteria can produce a very high quality of crude oil. This technology is quite promising in that it would not require a shift in technology by users of energy. We could continue to use our regular automobiles and airplanes while using a renewable feedstock.

While there may be pain in the near term with higher energy prices, new technologies are promising. We must not be tempted to reduce the pain by price controls or subsidies that will only prolong difficulties. High prices more than anything else will make us switch.

Whack-A-Mole for Economic Fallacies

2008-07-26T20:20:00.000-07:00

Alternatives including solar and wind will be adopted soon in large part due to market forces. However many politicians, look at alternative energy as a way to create "green collar" jobs. In their world, there are no costs involved only benefits. All we need to do is provide subsidies or launch a government program for alternative energy, and we will give plenty of jobs to people. This is only a thinly veiled rephrasing of the classic broken window fallacy. The story goes like this: A boy breaks shopkeeper’s window. The townspeople say that this accident makes work for the glazier who will buy bread, and who will in turn buy shoes. They conclude that the boy benefited the town economically. No matter how many times the fallacy is repeated as truth, it is still fundamentally wrong.

Returning to the idea of "green collar" jobs, we must remember that jobs are a cost. Giving someone a "green collar" job takes away resources in a very real way from another industry. For example, engineers, computer scientists, and construction workers among others are needed to create a wind farm. A mechanical engineer might design aircraft engines instead. A computer scientist could work for Google instead. Construction workers could build a road or a bridge. We are likely in a recession now, so the costs of giving someone a job may be lower. Instead of collecting unemployment they could be at least be doing something useful. A recession is only temporary though, and government programs and subsidies long outlive their usefulness. Government will end up picking winners, and the rest will be left behind paying the costs.

How should history judge leaders and public figures?

2008-07-22T15:05:00.000-07:00

How should history judge leaders and public figures? More specifically, how should motives versus results be weighed in this decision? If we judge a person by what they achieve for mankind, among the greatest benefactors are Bill Gates, John D. Rockefeller, Michael Milken, and JP Morgan. Their organizational talents, entrepreneurial spirit, and new ideas made people better off. Some of these people that did so much are thought of so little. Sometimes they are dismissed as criminals, thieves, and just all around greedy bastards even though they made life better for millions. Politicians will talk about how they have created jobs, but these are the kind of people that create jobs and entire industries. If we looked at motives instead, we might see the most productive among us as greedy or having otherwise impure motives. Many politicians sell themselves as having good motives such as helping the poor. Some policies are apparently well meaning, but further examination shows a different story. The late, great Milton Friedman said,

"Let me give you a very simple example. Take the minimum wage law. Its well-meaning sponsors -- there are always in these cases two groups of sponsors. There are the well-meaning sponsors and there are the special interests who are using the well-meaning sponsors as front men. You almost always when you have bad programs have an unholy coalition of the do-gooders on the one hand and the special interests on the other. The minimum wage law is as clear a case as you could want. The special interests are, of course, the trade unions, the monopolistic craft trade unions in particular. The do-gooders believe that by passing a law saying that nobody shall get less than $2 an hour or $2.50 an hour, or whatever the minimum wage is, you are helping poor people who need the money. You are doing nothing of the kind. What you are doing is to assure that people whose skills are not sufficient to justify that kind of a wage will be unemployed. It is no accident that the teenage unemployment rate – the unemployment rate among teenagers in this country -- is over twice as high as the overall unemployment rate. It's no accident that that was not always the case until the 1950's when the minimum wage rate was raised very drastically, very quickly. Teenage unemployment was higher than ordinary unemployment because, of course, teenagers are the ones who are just coming into the labor market -- they're searching and finding jobs, and it's understandable that on the average they would be unemployed more. But it was nothing like the extraordinary level it has now reached -- it's close to 20%."

We cannot read the motives of politicians and they will always try to sell their motives as pure. So, we should lean towards judging by the results achieved in the actual application of policies and in an overall economic system. Looking at India, we see politicians that said they wanted self-sufficiency or to help the poor. These policies failed and created insurmountable bureaucracy was created that slowed economic growth and kept almost everyone poor. They saw planning as the way to do this, but they failed miserably and they are to blame. Even if we assume their motives were on the whole good, which I doubt, their actions resulted in the unnecessary poverty for millions of people. Planning crowded out the real benefactors of mankind. India did not need another 5-year plan or subsidies for low productivity domestic industries. They needed a Bill Gates, a Rockefeller, a Larry Ellison, but these types of people were crowded out and the entrepreneurial, profit-seeking spirit was strangled and replaced with rent seeking, over planning, and a system that kept India in the past for so long.

Hedging the End of the World

2008-07-19T08:41:00.000-07:00

I recently saw a chart of the price of a credit default swap on the US Treasury. http://ftalphaville.ft.com/blog/2008/07/16/14538/unmitigated-disaster-in-chart-form/

For those of you that don't know anything about credit default swaps, basically it is a contract that says I will pay you if the underlying creditor defaults. So, I substitute my credit for the underlying.

1. Company or government issues a bond
2. I write you a contract that says I will pay you if that company or government defaults (doesn't pay up)
3. The company or government defaults I pay you the value of the bond. Typically, I would pay the value of the bond minus the recovery amount from selling the firm's assets to satisfy creditors.

The notional value of credit default swaps in the world is huge; it is estimated to be $62 trillion and most people have no idea about credit default swaps. Granted most traders in CDS probably do not have huge exposures, since they are in offsetting position. Let's suppose an investment bank writes a swap on a US Treasury. The idea of this leaves me wondering what event makes the Treasury default and leaves the investment bank(counterparty) able to pay. Since the credit default swap can be seen as a form of insurance, and insurance is only as good as the insurer. We have seen trouble with the municipal bond insurers, "By January 2008, many municipal and institutional bonds were trading at prices as if they were uninsured, effectively discounting monoline insurance completely." (Wikipedia) The credible rumor of a default by the US Treasury would damage any counterparty and a default would be the financial equivalent of the end of the world.

If you buy a credit default swap on the US Treasury, it is like you are buying insurance on the end of the world. How do you price this and should you really assume anybody will be around to pay up?

Is Healthcare a right?

2008-07-17T06:10:00.000-07:00

It is often taken as given that health care is right without much thought at all. Before you regard all health care as a right, think through your position first. Healthcare has been around for less than a 100 years in a form that could do you any good. A wealthy industrialist or his children of 100 years ago could much for an infection for all the money in the world. Healthcare is expensive now because it can actually do something.

First, you need to look at health care as a continuum. The poorest people in the world have zero or very close to zero healthcare. The richest can get the best doctors, procedures, and drugs instantly without any thought of the cost and little or no waiting time. Most Americans rely on employer or government provided health care with some waiting, deductibles, and paper work. Does everyone have the right to the same level of healthcare? If that it is the case, we will probably have to restrict the health care choices of the richest people since a government provided plan would be insolvent if it tried to provide the best of the best healthcare for everyone.

Looking at the high price of health care, we see that a large amount of the expenses are incurred in the last year of life and much of that in the last quarter. This sort of healthcare does not add much value, and there are many patients that would be more comfortable and better off spending their last days at home. Some of this healthcare spending is out of the desire to do something rather than nothing even when it would be better to do nothing at all. Healthcare adds much value in antibiotics for infections, vaccines, treating some traumas, hip replacements, and probably quite a few other areas. With developments in materials, nanotechnology, and biotechnology healthcare, at least in the short run may become more expensive if you want the absolute best money can buy. Like other technologies we may see a decrease in prices at some point even if the system is confounded by the third party payer issue, which I will discuss in a later entry.

Once, I went to the doctor after feeling ill for several days. After the doctor listened to my lungs and ordered a chest x-ray, I was admitted to the hospital for two days and administered IV antibiotics. When I began writing this entry, I was thinking about the different levels of care that could be administered in this case. Unless I was truly destitute, without a cent or credit to my name, I would not have been able to go to the doctor. However, even someone without health insurance in most cases could find the money to go to the doctor to get something checked out. People are generally not in a vacuum; they have access to friends and family, credit, and their own savings to pay for medical expenses. At least they should have the resources to pay for doctor visits and relatively routine medications. They may not have been up for being admitted to the hospital, but they could still knock out the infection with antibiotics. Of course, there are exceptions to this and everyone has heard an anecdote about health care in the United States. However, life expectancy in the United States is not all that bad. It is much publicized that American’s life expectancy is lower than other industrialized countries. However, much of this could be due to habits and demographics rather than an inferior health system. In any case, at least in life expectancy there cannot be too much inequality for the simple fact that there are no people walking around living 200 years or more skewing the average up.

For Lack of a Plan

2008-06-07T08:53:00.000-07:00

Some say that a more complicated economic system needs more central control. They advocate that in certain industries people cannot possibly make their own decisions. I want you to read a short essay from 1958 entitled I, Pencil, which tells us how the simplest products required complex, innumerable interactions in the marketplace. If you don't read it, let me summarize. You need wood, graphite, rubber, metal, and other products to produce a pencil. In order to get these products you need saws, mines, transportation infrastructure, tools to fabricate metal, and so on. You also need the know how of countless people working on production lines and managing the businesses that these products move through. I would not ask to be a central planner.

Austrian economists predicted the economic troubles of the Soviet Union and the reason why communism would not work. Prices for economists are not just what is listed on the sticker. All prices are signals. How scarce is something and how much do people want it. Soviet prices did not reflect any underlying realities or signals. Under the Soviet system, some goods accumulated with few buyers while lines formed for other goods. Here is a line in Poland for a store that recently received some toliet paper. Hundreds of thousands of prices were set without much regard for efficiency, the scarcity of raw materials, or consumer desires. The Soviet economy could not even provide decent quality consumer durables like refrigerators, televisions, and washing machines. Even with a good plan that produced "enough" consumer goods, the plan would leave little room for the unexpected. I suspect that many innovations of the 1990s that we now take for granted would not have been part of the plan.

Perspectives on Subprime

2008-04-04T08:17:00.000-07:00

I attended an America's Future Foundation (AFF) panel a couple of weeks ago regarding the subprime crisis. It is an organization for conservatives and libertarians, but there were a wide range of opinions. There were arguments over whether homeowners should be helped and what form it should take. Beyond the AFF panelists, almost every politician or pundit has some idea on what to do about subprime, undoubtedly full of unintended consequences that most will not understand until it is too late.

The first question, does the government have a role in fixing the subprime crisis? The panelists certainly did not agree with each other. The argument against government action was primarily philosophical--borrowers and lenders are responsible for their own mistakes. The practical considerations basically came down to the fact that the government would probably make it worse and there would be unintended consequences. For the panelists in favor of some government action, they argued that the dead weight losses from houses falling into disrepair and the like are substantial. The panelists against government action replied another man's loss can be another man's gain. Some investors bought contracts that increased in value if borrowers defaulted. Other investors were able to pick up cheap properties. They question whether government should pick winners and losers.

Since this panel was stacked with conservatives and libertarians, throwing piles of money at the problem was not on the table. I wish it were so for conservatives in Washington. For the panelists that saw a significant role for government, they believed that encouraging renegotiation of lending terms could help. While this idea sounds good to many people, there are some additional consequences. What happens to lending markets and securitization when the government intervenes and sets a precedent? Players in the mortgage markets, long and short, might have an even more difficult time with their models once the government changes the game.

On the Democratic side, voluntary cooperation has already been thrown out the window. Clinton wants to freeze rate increases and force a moratorium on foreclosures. Clearly, people who are defaulting on their mortgages would be pleased with this solution. However, the borrowers agreed to their loans. They could have rented a home or bought a smaller home instead of overextending themselves. While there were cases of unsavory characters in the mortgage industry, most the responsibility lies with the people who borrowed. The borrower has some obligation to know how much they can pay and the risks of a particular type of mortgage.

Regulation might be able ensure that defaults are extremely low in the future, but there is a big problem with this approach. We only have to look to Japan, Italy, or Argentina where it much more difficult to get a mortgage. First-time home buyers much save for a long period of time to even afford a down payment. Home owners find difficulty in getting loans on their homes to start a business. More regulations might make it more predictable and lead to fewer foreclosures, but even that is far from certain. Certainly, it would lead to a reluctance on the part of lenders to take risks on borrowers with short or patchy credit histories. Yet another unintended consequence.

Hearings on Big Oil

2008-04-02T09:10:00.000-07:00

In the latest Congressional hearings on Big Oil's "outrageous" profits, tax breaks, and climate change. The economic ignorance was especially concentrated in the Democratic congressmen, but they certainly had no monopoly on economic ignorance. Oh, but they did have stories of senior citizens and the poor not being able to afford gasoline and heating oil!

Let us begin with the numbers. Congressman Ed Markey (D) was outraged that the 5 oil companies represented made 123 billion in combined profits. Even if we grant the assumption that it is the Congress' job to regulate their profits, we find out that the profits are reasonable by any standard. Last year Exxon made 404 billion in revenue. Their net income was 40 billion, or about 10 percent. See for yourself, read Exxon's annual report. While this percentage is higher than many industries, it is certainly nothing to be outraged about, especially when you consider that the industry reported extremely low profits throughout the 1990s. A 10 percent net margin is a small price to pay for the management, engineering, and capital that brings refined products to the consumer. Then look at where the profits went. In Exxon's case much of the profits were used to repurchase stock or pay dividends. While the Congress has the image of Wall Street fat cats collecting all of these dividends, it is not the case. Read this study on the ownership of "big oil".

I admit that I do not know much about the tax laws for oil companies, but the financial statements show that oil companies pay a substantial amount in taxes. Exxon paid nearly $30 billion in taxes last year. Any well-bred libertarian would be against unfair tax breaks and subsidies, but it seems oil companies pay quite a bit already. If we want to attack industries with subsidies, few have their hands in the pot more than "Big Corn" with the ethanol hoax and countless farm programs. I believe it would be extremely poor policy to raise corporate taxes when countries around the world are lowering their taxes. The United States should not make it more expensive and difficult to compete.

The Congressman want a tithe (10% of their profits) at the altar of alternative energy from the oil companies. While we will move towards other sources of energy and energy storage, we do not know which technologies or companies will succeed. We could force the oil companies to invest in alternative energy or have the Congress ask very nicely, but it is yet another case of seen and unseen. We would see the additional investment in alternative energy, but we would not notice the oil companies drawing capital away from smaller and more innovative companies in the alternative energy sector. Think about this question for a minute--Is a gigantic, lumbering oil company that is optimized to efficiently refine and transport refined products the best vehicle to research and develop new technologies? Perhaps not. The leaders in providing energy in the future are probably companies few people know.
Let the markets and creative destruction work.

Finally, the Congressmen do not understand prices. They seem unwilling or unable to grasp what a price means. Many of the Congressmen were concerned about climate change from the use of oil. Ostensibly, the primary purpose of this hearing was climate change. Of course, a populist attack on "price gougers" was not far behind. Somebody should let the chairman of the hearing in on a little secret -- the law of demand. For people concerned with climate change, they should welcome the latest price increases in the price of gasoline and heating oil. While demand is rather inelastic for oil, people will change their behavior. In the short term, they drive less, buy more efficient cars, and buy better insulation for their houses. In the longer term, they might relocate closer to their workplace. On the supply side, the high price of oil is the best incentive for research in alternative energy. Pick up a copy of MIT Technology Review or search the internet for companies that are currently developing and improving solar, wind, biofuels, and energy storage technologies.

Coming soon, advice for anyone called in front of a Congressional hearing.

Our Greatest Gift

2005-06-22T22:24:00.000-07:00

Recently, I discussed politics at a friend's house over dinner. While, he's not so far off that he says US knew about/planned 9-11, he seems to think that there will be martial law imposed, that sort of thing if another terrorist attack occurs. America is less free than it used to be. However, this loss of freedom is part of larger trend. Reagan talked about it in 1964 while campaiging for Goldwater.

"Meanwhile, back in the city, under urban renewal the assault on freedom carries on. Private property rights are so diluted that public interest is almost anything that a few government planners decide it should be."

- Ronald Reagan - A Time for Chossing

A little regulation here and there for the supposed common good has been shown to eat away at the unique freedoms in America and other civilized nations. Most people in this country say they support 1st Amendment rights. However, many of these people support a large government and a welfare state. I would like to call attention to a case several years ago in the 9th Circuit Court of Appeals. In Berkeley, CA, three individual protested "the Berkeley Three", printed newsletters, and talked to the press concerning a housing project for substance abusers, and the like. They didn't want this housing project built. It sounds like a textbook case of free speech, but this dare I say it --common sense did not prevail in the minds of some HUD officials. Under the Fair Housing Act, it is illegal to "coerce, intimidate, threaten, or interfere with" any person exercising his housing rights. The creation of these new rights, interferes with real and explicit constitutional rights. While, the so-called Berkeley Three won there case in the 9th Circuit Court, it is alarming that the welfare state and regulatory agencies are attempting to destroy freedom.

Know your rights

Ask a Democrat about your rights, and you'll find rights to housing, healthcare, prescriptions, childcare for working mothers, family and medical leave, and who knows what else. These rights come at the expense of one's natural rights. While some Republicans do support the status quo of the welfare state, and other Republicans want to restrict freedom in other ways, I believe there is a place in the Republican party for someone who wants to roll-back government. I have been disappointed by Republicans for not having the conviction to push for full privitization of social security.

Eminent Domain
I suppose I should add something about recent news today. Today, the supreme court ruled that a city can use eminent domain to take property for private use.
Basically, if there is a plan, the city can pay "fair-market" value for the property and take your house. If the city believes it can have more tax revenue, they can take your house and put a retailer, hotel, or a factory on the land. Justices O'Connor, Thomas, Scalia, and Rehnquist sided for individual rights and freedom. Unfortunately, five justices decided that property rights were no longer relevant as long as somebody had a plan.

2005-06-20T23:37:00.000-07:00

In the car I was listening to WLS, and there was a host from the far left filling in. I heard complaints about not enough money going to minority districts. They talked about money for education and for "economic development." More money always seems to be the answer. However, spending at all levels of government on education, economic development, and whatever other programs that are supposed to save the world has risen over the decades only to be followed by no improvement in the situation. Decades of failure have not convinced everyone that government spending is not the answer. (Unless you still believe the New Deal got us out of the Great Depression) Many still believe if they give the government some more money and power, it will be better. They will protect us and solve all our problems, but of course they never do. As Milton Friedman said, "Nobody spends other people's money as carefully as he spends his own." When the government takes money from those who earn, the money is not carefully spent in most cases. Welfare, social security, and education run by the government have produced costs that are out of control and dismal results. While the US military is the best in the world, there is a huge amount of waste in Pentagon as well. We would be better off having those that earn the money, keep their money.

Perhaps, I'll form this into a more a coherent rant...

Bush Nominates John Bolton UN Ambassador

2005-03-07T21:27:00.000-08:00

Bolton does not shy from defending American interests and going against tyrannical governments like North Korea. America needs a strong figure as ambassador to the UN, and John Bolton is a great choice. Provided that he is confirmed, he will be able to get things done. American interests will be pushed forward.

FEC and Blogs

2005-03-06T18:34:00.000-08:00

Bradley Smith says that the freewheeling days of political blogging and online punditry are over.
In just a few months, he warns, bloggers and news organizations could risk the wrath of the federal government if they improperly link to a campaign's Web site. Even forwarding a political candidate's press release to a mailing list, depending on the details, could be punished by fines." -- CNET

Well, it looks like the "freewheeling" days of free political speech will come to an end if the FEC and proponents McCain-Feingold get there way. Welfare rights have been read into to the Constitution like a right to healthcare or housing. Natural rights and individual rights like property rights have been eroded for years. The right to political speech may be the next to go. The upside is that it will be difficult to enforce. A blogger can publish from anywhere, and disobey the FEC. So, just try to regulate the Internet, FEC. I just don't think it will work.
-- Andrew Rawlings

Donate to the GOP!

Or if you prefer help the Libertarian party.

Take a look at these articles
http://michellemalkin.com/archives/001654.htm

http://news.com.com/The+coming+crackdown+on+blogging/2008-1028_3-5597079.html?tag=st.prev

Some stocks to look at

2005-03-06T18:27:00.000-08:00

Petroleum Development (PETD) - Natural gas and oil. Own options

Telular (WRLS) - Fixed Wireless Own 200 shares

Synaptics (SYNA) - Touch sensitive devices for notebooks and ipod. Soon to be in wireless phones. I have 100 shares

Hello World

2005-02-20T15:09:00.000-08:00