Sprizouse

The New Gmail Sucks

2012-01-13T18:23:00.002-05:00

2011-12-02T14:46:00.000-05:00

Mike Konczal takes a hard look at the Obama administration's handling of the economy and doesn't like what he sees:

With job growth failing to exceed population growth each month, and with no serious increase in the percent of Americans working, 2011 was a lost year for the economy.

Lost years for the economy have major consequences. Beyond the human misery that results, they put the entire project of liberal governance at risk. Choices made early by this administration resulted in no advancement on three fronts... fiscal policy... monetary policy... and dealing with the problems in the housing market....

In the 2010 State of the Union, President Obama stated that he would freeze 2011 discretionary spending even though unemployment was projected to be above 8 percent... This conventional wisdom gave the Republicans the leverage they needed to destroy any pro-active economic agenda.

Thus the Democrats spent 2011 -- which could have been a crucial year for the recovery -- in a futile debate with the Republicans over the budget. From the original government shutdown in April to the debt ceiling fights in July, Republicans showed that they were capable of making even the most trivial changes to the budget costly to the Democrats. As time went on the administration became ever more willing to make huge concessions to get a deal and restart the economy, and each time was left at the table....

Monetary policy is another avenue that spent 2011 in limbo... In the midst of collapsing prices, President Franklin Roosevelt in a fireside chat in 1933 announced that "[i]t is the Government's policy to restore the price level first"-- a signal to the markets that the New Deal was going to take monetary policy very seriously. President Obama has shown less interest in monetary policy, reappointing the moderate Republican Ben Bernanke to office and leaving [Fed board] seats open for years.... Obama's lack of movement on recess appointments has left the Fed tilted to the right. Since the other people that sit on the Federal Reserve are hard conservatives appointed by banks, getting people concerned about unemployment there is even more important.

At the end of 2011, key liberals... started talking about a new way of doing Federal Reserve policy based on "nominal GDP targeting" which would allow for higher inflation in weak economic times. Meanwhile, Chicago Federal Reserve President Charles Evans put out a plan to allow 3 percent inflation while unemployment is above 7 percent. These are good ideas; the administration could put them into practice by filling vacancies with appointees who understand their value.

The third important element of the recovery is restoring the housing sector... Foreclosures are a lose-lose-lose, devastating homeowners and neighborhoods, ravaging municipality budgets and hitting the creditors themselves... The most obvious way to deal with this is to allow courts to write down mortgage debt in bankruptcy, but the Obama administration passed on requiring bankruptcy modifications...

Ever since then, abuses in the mortgage payment "servicing" system-ranging from robo-signing to phantom foreclosure referrals to illegal foreclosures on servicemen overseas-have been reported by both community activists and from financial analysts. In late 2010, the largest banks voluntarily halted foreclosures to investigate before going back to business as normal.

The administration could have pushed hard on investigating the foreclosure market. Instead they pushed for quick settlement with the largest banks...

In 1938, shortly after premature fiscal and monetary tightening triggered a recession, the economist John Manyard Keynes wrote a worried letter to President Roosevelt. He was, he wrote, "terrified lest progressive causes in all the democratic countries should suffer injury, because you have taken too lightly the risk to their prestige which would result from a failure measured in terms of immediate prosperity. There need be no failure. But the maintenance of prosperity in the modern world is extremely difficult; and it is so easy to lose precious time."

Everything progressives have fought for -- from the policy advancements of the Obama administration like healthcare and financial reform to the New Deal and Great Society programs that remain, like Social Security and Medicare -- has been at risk as a result of this Great Recession. A longer period of sustained joblessness will wreck the working class and devastate the budget, leaving our economy even weaker.... There are ways forward; it is just a question of whether the administration is prepared to take them. It is easy to lose precious time, and we've just lost a full year with nothing to show for it.

Taxing the 1%

2011-12-01T15:25:00.000-05:00

Nick Hanauer, a 0.1%-er on taxing the rich... his whole op/ed is worth a look, but here's the best quote, which helps explain why top-heavy societies don't work:

Since 1980, the share of the nation's income for fat cats like me... has increased a shocking 400 percent, while the share for the bottom 50 percent of Americans has declined 33 percent. At the same time, effective tax rates on the superwealthy fell to 16.6 percent in 2007... In my case, that means that this year, I paid an 11 percent rate on an eight-figure income.

One reason this policy is so wrong-headed is that there can never be enough super-rich Americans to power a great economy. The annual earnings of people like me are hundreds, if not thousands, of times greater than those of the average American, but we don't buy hundreds or thousands of times more stuff. My family owns three cars, not 3,000. I buy a few pairs of pants and a few shirts a year, just like most American men. Like everyone else, I go out to eat with friends and family only occasionally.

If the average American family still got the same share of income they earned in 1980, they would have an astounding $13,000 more in their pockets a year. It’s worth pausing to consider what our economy would be like today if middle-class consumers had that additional income to spend.

The Roots of Police Violence

2011-11-22T15:24:00.000-05:00

There have been way too many instances of police violence against peaceful protestors during the OWS movement (see the eleven videos on Garance Franke-Ruta's post at the Atlantic for examples). Glenn Greenwald gets behind the roots of all the recent police violence:

The now-viral video of police officers in their Robocop costumes sadistically pepper-spraying peaceful, sitting protesters at UC-Davis shows a police state in its pure form. It's easy to be outraged by this incident as though it's some sort of shocking aberration, but that is exactly what it is not...

There are several points to note about this incident and what it reflects:

(1) Despite all the rights... guaranteed by the U.S. Constitution, the reality is that punishing the exercise of those rights with police force and state violence has been the reflexive response in America for quite some time...

The intent and effect of such abuse is that it renders those guaranteed freedoms meaningless. If a population becomes bullied or intimidated out of exercising rights offered on paper, those rights effectively cease to exist. Every time the citizenry watches peaceful protesters getting pepper-sprayed -- or hears that an Occupy protester suffered brain damage and almost died after being shot in the skull with a rubber bullet... they become fearful... of exercising their rights in a way that is... threatening to those in power. That's a natural response, and it's exactly what fear imposed by all abusive police state actions is intended to achieve...

Implanting fear of authorities in the heart of the citizenry is a far more effective means of tyranny than overtly denying rights.... Overzealous prosecution of those who engage in peaceful political protest... are all about deterring meaningful challenges to those in power... Rights are so much more effectively destroyed by bullying a citizenry out of wanting to exercise them than any other means.

(2) Although excessive police force has long been a reflexive response to American political protests, two developments in the post-9/11 world have exacerbated this.

The first is that the U.S. Government -- in the name of Terrorism -- has aggressively para-militarized the nation's domestic police forces...

The second exacerbating development is more subtle but more important: the authoritarian mentality that has been nourished in the name of Terrorism. It's a very small step to go from supporting the abuse of defenseless detainees (including one's fellow citizens) to supporting the pepper-spraying and tasering of non-violent political protesters.

(3) Beyond the light it is shedding on how power is really exercised... this UC-Davis episode underscores why... the Occupy movement is one of the most exciting, inspiring and important political developments in many years. What's most striking about that UC-Davis video isn't the depraved casualness of the officer's dousing the protesters' faces with a chemical agent; it's how most of the protesters resolutely sat in place and refused to move even when that happened... We've repeatedly seen acts of similar courage spawned by the Occupy movement.

It was the NYPD's abusive pepper-spraying, followed by Mayor Bloomberg's lawless destruction of the Zuccotti Park encampment, that prompted far more people than ever to participate in the next march across the Brooklyn Bridge. A tear gas attack on Occupy Oakland was followed by a general strike of 20,000 people. And this truly extraordinary, blunt and piercing open letter demanding the resignation of the heinous UC-Davis Chancellor Linda P.B. Katehi was written by a young, untenured Assistant Professor -- Nathan Brown -- who obviously decided that his principled beliefs outweigh his careerist ambitions.

This is the most important effect of the Occupy movement: acts of defiance, courage and conscience are contagious.... The protest movement is driving the proliferation of new forms of activism, citizen passion and courage, and -- most important of all -- a sense of possibility...

Where's the Super Committee for Job Creation?

2011-11-21T19:37:00.000-05:00

Mark Thoma, in a column in the Fiscal Times, wonders why we don't have a Super Committee for Job Creation:

The bipartisan Super Committee trying to forge a politically acceptable path for deficit reduction ended in a super fail, and one of the big reasons... is disagreement over the extension of the Bush tax cuts for high income households.

[Democrats]... argue that the present tax structure places too little burden on the wealthy and too much on the middle and lower classes, and therefore the expiration of the Bush tax cuts... would make taxes more progressive and more equitable without endangering the recovery. Allowing the cuts to expire would also provide $800 billion in revenue over the next ten years and this would help preserve important social programs.

The failure... to come to agreement on the Bush tax cuts does not end the battle... If Congress does nothing... the two percent payroll tax cut [will] expire in December, and extended jobless assistance [will] also [expire].

I don't expect Republicans to put the unemployed at the forefront of their policy agenda. It comes as no surprise that they would insist on tax cuts for the wealthy despite their purported concern for the deficit, and then sing a different tune for the working class...

But I do expect Democrats to be the champions of the poor, the underprivileged, and the unemployed. When... did the need for deficit reduction... come to be more important than the needs of households struggling with the recession? Why aren't Democrats talking about the need to help the unemployed at every possible opportunity? Where's the Super Committee for Job Creation?

President Obama and many Democratic members of Congress have endorsed the idea that budget deficits are biggest threat we face... and this has helped to convince the public that the national debt is our biggest concern, and that we simply do not have the resources to.. help with job creation.

The main cause of our present deficit is a combination of the recession, the Bush tax cuts, and wars, and those three items will continue to be the main source of deficits in the near future. But Democrats have allowed Republicans to portray the problem as out of control spending on social programs that require super special commissions to resolve immediately, and it will be difficult to change that perception now....

But it's important that Democrats at least try since any success at all would make a huge difference to the unemployed... I would like to see Democrats adopt a tougher stance on the need for higher income households to pay more in taxes so that important social programs can be preserved. But right now our main problem is the unemployment crisis.

William K. Black on OWS

2011-11-19T04:11:00.003-05:00

William K. Black was one of the premier federal litigators during the S&L crisis. He spoke last week at Occupy LA:

In the Savings and Loan crisis, which was 1/70th the size of this crisis, our agency made over 10,000 criminal referrals, and that resulted in the conviction on felony grounds of over 1,000 elites in what were designated as major cases...

... Epidemics of fraud [are] led from the C-Suite, from the CEOs and CFOs... in the Enron era, [there were] always frauds from the very top of the organization, and in this crisis, the frauds came from the top of the organization again.

But what's different in this crisis? In this crisis, the same agency that I worked with, that made over 10,000 criminal referrals, in a tinier crisis, made zero criminal referrals. They got rid of the entire function. And so there are zero convictions of anybody in the elite ranks of Wall Street.

And if they can defraud us with impunity then they will cause crisis after crisis and they will produce maximum inequality. The group that has the audacity to refer to itself as the "productive class" is the largest destroyer of lives, of jobs and of wealth of any group ever produced in this world.

They wiped out six million existing jobs and five-to-six million jobs that would have been created. As you've heard they've left 26 million Americans wanting full-time work with no ability to find that work...

And then they had the nerve to say [that] they are "the productive class"... [but] they are mass destroyers of jobs...

Everybody opposed our re-regulation of the [financial] industry. The big deregulation bill... occurred in 1982, and became effective in 1983... but by November of 1983 we were [trying to re-regulate] the Savings and Loan industry, and we were called re-regulators because that was the greatest swear-word the Reagan Administration believed existed; to call people "re-regulators". But [opposition to re-regulating] was not partisan, a majority of the members of the [Democratically-controlled] House... co-sponsored a resolution saying, "do not... re-regulate"...

The Reagan Administration was so outraged that we were closing insolvent S&L's with great political support, that the OMB threatened to file a criminal referral against the head of our agency on the grounds that he was closing too many insolvent banks. Have we had that problem recently? Do you see Geithner out trying to close the big, powerful banks?

We can prosecute these frauds... the Federal Housing Finance Administration (FHFA) has just filed complaints saying seventeen of the largest banks in America committed massive fraud, endemic fraud, and that there is a paper trail proving that they did so.

So where is the justice department? Why is it not indicting these clear frauds?

... Remember, it is the lenders who put the "lies" in "liars loans", not the borrowers. We know this empirically. And we stopped that [in 1982] because, [as regulators] that was insane. So guess what happened, the leading folks making liars loans gave up their federal charter; gave up federal deposit insurance and became a mortgage bank, for the sole purpose of escaping regulation.

And they changed their name... to Ameriquest... the leading predatory lender that, in addition to making liars loans, every day, every day of the week, targeted minorities, to destroy [minorities'] wealth... they targeted latinos, they targeted blacks, and they were caught three times doing this, and the justice department refused to prosecute, instead [Ameriquest] settled for $400 million, [but] guess what happened to the head of Ameriquest? ... we [made] him our ambassador to the Netherlands.

Why do you think we made him our ambassador to the Netherlands? Because he was the leading political contributor to the President of the United States of America.

And that's bad, but what comes next is far worse, remember [that Ameriquest] is the most notorious fraud in the nation. [It is a company that] targets minorities, [and] everybody knows it does so, [but] two entities rush to acquire [Ameriquest's] personnel and business, and their names? Citicorp, and Washington Mutual, who become two of the most notorious frauds in [the subprime crisis]...

When we prosecuted [in the S&L crisis] we had a 90% conviction rate, [even] when [the defendants] had the best criminal defense lawyers in the world, and they spent money like water to protect the CEO from going to prison. So when they tell you, "no one can stop this", it is utter nonsense.

[I] will leave you with these statistics: The FBI warned of this in September of 2004, in open testimony. It warned, expressly, that there was an... epidemic of mortgage fraud, and it predicted it would cause a financial crisis.

If that's not enough, the [mortgage] industry's own anti-fraud experts, in 2006, in writing, went to every mortgage banker in America... and said three things:

1.) "Stated income loans" are an open invitation to fraudsters
2.) The incidence of fraud in [stated income loans] is 90%
3.) These loans are deserve the phrase... "liars loans" because they are pervasively fraudulent

What did the industry do after it was warned? Did it stop making these loans? No. It massively increased the amount of these loans such that by 2006, one out of every three home loan in America was a "liar's loan" and that's why we have a crisis. And it came from the very top of these organizations, and it went through, as the FHFA said in its complaint, the largest banks in the world, [which] were endemically fraudulent.

It is not a few rotten apples, it is an orchard of one-percenters who are rotten to the core.

Taibbi on OWS

2011-11-11T13:31:00.000-05:00

Taibbi article from yesterday. It's worth reading in its entirety:

I have a confession to make. At first, I misunderstood Occupy Wall Street.... my initial impression was that it would not be taken very seriously.... [M]odern finance is a giant mechanical parasite that only an expert surgeon can remove. Yell and scream all you want, but [Blankfein] and his fellow financial Frankensteins are the only ones who know how to turn the machine off.

That's what I was thinking during the first few weeks of the protests. But I'm beginning to see another angle. Occupy Wall Street... [is] about providing a forum for people to show how tired they are not just of Wall Street, but everything. This is a visceral, impassioned, deep-seated rejection of the entire direction of our society...

We're all born wanting the freedom to imagine a better and more beautiful future. But modern America has become a place so drearily confining and predictable that it chokes the life out of that built-in desire.

There's no better symbol of the gloom and psychological repression of modern America than the banking system, a huge heartless machine that attaches itself to you at an early age, and from which there is no escape... This is why people hate Wall Street. They hate it because the banks have made life for ordinary people a vicious tightrope act; you slip anywhere along the way, it's 10,000 feet down into a vat of razor blades that you can never climb out of.

That, to me, is what Occupy Wall Street is addressing. People don't know exactly what they want, but as one friend of mine put it, they know one thing: FUCK THIS SHIT! We want something different: a different life, with different values, or at least a chance at different values.

And here's one more thing I was wrong about: I originally was very uncomfortable with the way the protesters were focusing on the NYPD as symbols of the system. After all, I thought, these are just working-class guys from the Bronx and Staten Island...

But I was wrong. The police in their own way are symbols of the problem. All over the country, thousands of armed cops have been deployed to stand around and surveil and even assault the polite crowds of Occupy protesters. This deployment of law-enforcement already dwarfs the amount of manpower that the government "committed" to fighting crime and corruption during the financial crisis. One OWS protester steps in the wrong place, and she immediately has police roping her off like wayward cattle. But in the skyscrapers above the protests, anything goes.

This is a profound statement about who law enforcement works for in this country.... There have already been hundreds of [Occupy] arrests, which is hundreds more than we ever saw during the years when Wall Street bankers were stealing billions of dollars from retirees and mutual-fund holders and carpenters unions through the mass sales of fraudulent mortgage-backed securities.

It's not that the cops outside the protests are doing wrong, per se, by patrolling the parks and sidewalks. It's that they should be somewhere else. They should be heading up into those skyscrapers and going through the filing cabinets to figure out who stole what, and from whom. They should be helping people get their money back. Instead, they're out on the street, helping the Blankfeins of the world...

People want out of this fiendish system, rigged to inexorably circumvent every hope we have for a more balanced world. They want major changes. I think I understand now that this is what the Occupy movement is all about.... Eventually it will need to be specific about how it wants to change the world. But for right now, it just needs to grow... It doesn't need to tell the world what it wants. It is succeeding, for now, just by being something different.

Journamalism - Gregg Easterbrook Edition (Vol. Eleventy Hundred)

2011-11-10T21:08:00.001-05:00

Easterbrook's up to his old, stupid tricks again, pretending to be the "middle" while really being as wingnutty as ever. His latest column praises Mitt Romney for being a similar "middle" wingnut and then he does a drive-by on Social Security.

Easterbrook believes Mitt Romney should be praised for threatening to take away benefits for seniors and poor people. I'll point out everything wrong with Easterbrook's column below, but I would also like to point out that I commented on the article (though it was perhaps a little ranty) and had my comments deleted by Reuters.

I'm not sure they deserved to be. And if Reuters wants to consider itself a reputable news organization it probably ought to think long and hard about letting Easterbrook write the crap he writes, misinforming his readers in the process and deleting comments... that way lies RedState (and no, I will not link to RedState).

Anyway, here's how Easterbrook starts. He opens by praising Romney for what Easterbrook feels is a "gold" statement:

"We cannot with moral conscience borrow trillions of dollars that can only be repaid by our children."

Easterbrook comments:

Reckless borrowing, with the invoice passed to our children – nobody in power in Washington right now will be asked to repay the national debt – is not just numbers, it is a moral issue. Romney recognizes this.

Both Easterbrook and Romney are guilty of throwing out pointless platitudes here, and neither displays the slightest understanding of economics. The federal government can currently borrow billions of dollars for 2% per year for ten years. If the economy improves (without further fiscal policy action, this is unlikely to happen immediately) then the government really should be able to inflate away the interest payments on all those billions (and probably a lot of the principal as well). They should be able to do that long before the ten years is even up. Is it reckless for the government to borrow billions when the market is willing to shove billions at it at such ridiculous low rates? No.

Conversely, is it reckless of the government to let the opportunity to borrow at ridiculously low rates pass without taking advantage of it? Yes, it is. Especially when the government could use those billions to invest in infrastructure and provide jobs that might re-inflate the economy and then provide a much broader and healthier tax base to pay off the debt.

The truly horrifying part of the article is when Easterbrook follows Romney into his baseless attack on Social Security (as is typical of every single wingnut in existence). Easterbrook calls the following line of crap, '24-karat gold':

Romney placed his hand on the third rail of American politics, by proposing Social Security cutbacks. He said, “I believe we can save Social Security with a few commonsense reforms. First, there will be no change for retirees or those near retirement. No change. Second, for the next generation of retirees, we should slowly raise the retirement age. And finally, for the next generation of retirees, we should slow the growth in benefits for those with higher incomes.”

Easterbrook adds to Romney's nonsense by saying (emphasis mine):

The Social Security trustees report that the system can currently pay only about three-quarters of scheduled benefits. In 2010, the report notes, that system wasn’t even self-sustaining, having to draw on the federal debt. If benefits aren’t trimmed, either taxes must rise or the federal deficit must accelerate anew. Neither would be good for the country, and that’s assuming China would keep loaning us additional money, which may not be an accurate assumption.... Many seniors need their Social Security checks, but those who don't should no longer receive them.

Where to begin with all this lunacy? First of all, you knew that Easterbrook would say that raising taxes is an impossibility didn't you? But raising taxes to the levels of the mid-90s, you know back when Bill Clinton was busy destroying the economy, would completely fix Social Security's funding problems. Of course Easterbrook, being a wingnut, has completely ruled that out. He's also ruled out taxes on Wall Street, financial speculation, cuts to military spending... all of it. We only need to make small changes to fund Social Security for the next eighty years, but Easterbrook says those small changes are too much, instead we should cut benefits!!!

Next Easterbrook simply lies about the Social Security trustees report when he claims that the system can only pay 3/4 or scheduled benefits. Easterbrook's lying because he knows that the report states that Social Security can pay FULL BENEFITS to everyone until 2036 (without making ANY adjustment whatsoever) but that, after 2036, if there have been absolutely no adjustments made to the fund's income, it will only be able to pay 77% of what it should to every retiree. And again, this is without any adjustment (meaning no tax increases on the wealthy, on Wall Street, on financial speculation, on ANYTHING). So is Easterbrook lying about this? Well, by not saying that the fund is fully healthy until 2036 and by not saying that it will only pay 77% of benefits AFTER 2036 (if no changes are made to the fund's income) he's trying to make a wingnut point by deliberately misleading his readers that the fund is not healthy NOW. (which, to me, amounts to an outright lie).

But this is typical, Easterbrook and Romney are doing their conservative duty to hammer a valuable, worthwhile social program by lying about its current funding.

Finally, Easterbrook lauds Romney for proposing that Social Security stop paying well-off retirees their benefits on the one hand, but saying we can't raise taxes on the other.

Well, first of all, not paying benefits to well-off retirees really amounts to a progressive tax, doesn't it? The well-off will be paying taxes for benefits they don't receive, so why not just raise taxes on the wealthy? Wouldn't that be easier? Raise taxes on the well-off and keep paying everyone seems like a much easier solution to me. And while the average person might not understand that 'means-testing' for Social Security benefits (which is what Easterbrook has proposed) amounts to a progressive tax, someone who's a Visiting Fellow at the Brookings Institution, a public intellectual, and has a paid gig writing for Reuters? Well, he really, really, reeeeally oughta understand this.

But very well, he doesn't. What he also doesn't understand about his moronic proposal is that means-testing for Social Security will also force the government to be more invasive of citizens' private lives. To determine if a person should or should not receive Social Security the federal government will now have to determine not just a private person's wealth, but their dependents, their monthly outlays and a whole host of other information. And they'll probably have to do this regularly. Who the fuck wants that? Why not just leave the well-funded program the way it is, so that when you reach eligibility you get Social Security, no questions asked. And why not fund that system by raising taxes on the rich? Um, of course, all that's already been ruled out before even starting.

Just typical.

UPDATE: I forgot that somewhere in Easterbrook's idiocy he mentioned the threat of China not buying our debt anymore. But remember, if China stops buying Treasuries, that would be a good thing. Which once again proves Easterbrook is a complete ignoramus on all matters economic.

Taste, Wine, and Not Understanding Permutations

2011-11-03T04:17:00.003-04:00

Jonah Lehrer wrote an article on Wired discussing the limited sense of taste and how taste can be easily fooled. But he's wrong on nearly all fronts. Here's his opening:

Let's be blunt: The tongue is really dumb. Unlike the rest of our sensory organs, which are exquisitely sensitive, that lump of exposed muscle sitting in the mouth is a crude perceptual device, able to only detect five different taste sensations... [but], we are convinced that the tongue is remarkably sensitive, able to perceive all sorts of subtle flavors. That's why we rhapsodize about the taste of our favorite foods and drinks...

Obviously Lehrer doesn't understand the mathematics of permutations. Sure, the tongue is capable of only sensing five separate tastes: salty, sour, bitter, sweet and umami (the brothy, mouthwatery taste of meat is considered umami) but that doesn't mean taste isn't infinitely complex. In fact, proving that taste is infinitely complex is inestimably easy:

Let's mix only two of each of the five basic tastes together in perfect, 50/50 harmony. Doing that gets us up to 20 different tastes right away. To make this point in a visual manner, I've listed the combinations below (and keep in mind that Salty, Salty is definitely different than Salty, Nothing... for instance, if I pour a whole cup of salt into your mouth, it will taste a lot more like Salty, Salty, than if I put one grain of salt on your tongue, which will taste more like Salty, Nothing). Anyway, here are the 20 different tastes:

Salty, Nothing
Salty, Salty
Salty, Sour
Salty, Bitter
Salty, Sweet
Salty, Umami
Sour, Nothing
Sour, Sour
Sour, Bitter
Sour, Sweet
Sour, Umami
Bitter, Nothing
Bitter, Bitter
Bitter, Sweet
Bitter, Umami
Sweet, Nothing
Sweet, Sweet
Sweet, Umami
Umami, Nothing
Umami, Umami

As we can see, just from the "limited" five tastes we have a combination of 20 very distinct tastes the tongue can appreciate. At minimum.

But what if we take this a step further, and mix all five tastes together perfectly so that each 'taste' in any individual piece of food represents EXACTLY 16.67% of the food being eaten? Suddenly we get to 462 different tastes that our "dumb" tongues can sense. Below are four of the possible combinations:

Salty, Salty, Sour, Bitter, Sweet
Salty, Sweet, Sour, Bitter, Nothing
Salty, Sweet, Sweet, Bitter, Nothing
Sweet, Sweet, Bitter, Umami, Umami

You get the idea. But again, these 462 different combinations are still operating on a binary scale of taste (either it's salty or not salty, there is no in-between). But anyone who's eaten anything knows that we don't have a binary sense of taste. There are subtle and not-so-subtle degrees of taste.

As I mentioned before, if I drop one grain of salt in your mouth, it will taste different than if I ask you to swallow a teaspoon of salt. And if I pour an entire salt-shaker into your mouth you'll probably gag and ask for a gallon of water to wash it down and it will certainly taste different than the teaspoon of salt I gave you earlier. But to assume that we only have 462 different tastes means we have to assume only six degrees of possible salt combinations. Which basically means that this particular combination...

Salt, Salt, Salt, Salt, Salt, Salt

... tastes exactly the same to every single person on the planet. Which I'm not sure is true. And that means that the five "tastes" have to have more than six degrees to them, which raises the possibility that our "dumb" tongues can sense nearly infinite possibilities.

However, for the sake of argument, I'll assume that all tastes are all exactly the same and that "Salt, Salt, Salt, Salt, Salt, Salt" tastes exactly the same to every single person on the planet (hey, it might). If that's true then yes, there are only 462 different combinations of taste in any single piece of food. But wait, that still doesn't account for texture does it? No, of course not, how stupid of me!

How many textures should I add in? Um... hard, medium and soft with no further degrees or differences (but is there a difference in texture between the "hardest" and "softest" cheeses and "hardest" and "softest" breads? Of course there is, but for this experiment only one degree of hard, medium and soft will suffice). So if I add hard, medium and soft into the permutation formula suddenly we have 24,310 different possible tastes. And Lehrer's "dumb" tongue statement starts falling apart rather quickly.

But now we need to go further and add spiciness and temperature to the foods we're eating (and, by the way, there is an absolute CERTAINTY that temperature isn't a binary experience). Once we add those two into our formula now we're up to 352,716 different possible tastes that our "dumb" tongues can appreciate (and this number was arrived at using assumptions designed to limit it to the lowest possible integer).

In short, you don't have to be some egg-head scientist to understand all of this, all you need to understand is basic math. And any egghead scientist (or person who wrote a book titled "How We Decide") ought to understand basic math. If they did, then writing about the tongue only being able to sense five different tastes would be either misleading or stupid on their parts.

Are there are million different taste to red wine? No. Can wine reviewers be fooled, and does cheap wine often taste better than expensive wine? Absolutely. But that doesn't mean Lehrer's article makes any sense. No. And for proof, look at the last few paragraphs he offers:

A new study led by Adrian North of Heriot-Watt University adds to the indictment [of the tongue]... [He] has shown that when people drink wine to the accompaniment of music, they perceive the wine to have taste characteristics that reflect the nature of that concurrent music... Some of the participants sampled their glass to the tune of music identified... as powerful and heavy; others drank their wine to music rated earlier as subtle and refined; others to the tune of zingy and refreshing music; and lastly, the remaining participants drank their wine with mellow and soft music in the background....

After they'd savored their wine for five minutes, the participants were asked to rate how much they felt the wine was powerful and heavy; subtle and refined; mellow and soft; and zingy and refreshing. The results showed that the music had a consistent effect on the participants' perception of the wine. They tended to think their wine had the qualities of the music they were listening to.

He's gone off the rails here, because he's now delved into the world of Neuro-Linguistic Programming and doesn't realize it (and neither do the creators of the experiments, apparently). Humans are highly suggestible creatures. In fact, stupid things like not shaking hands with someone can be enough to disrupt their routine and put them into a suggestible trance. If the general atmosphere of a place, its music, or the specific words a waitress (or experimenter) says, are being used to validate something OTHER than NLP, then that study is inherently flawed.

But this is old news. Or, at minimum, this should be old news to someone who, again, wrote a book called "How We Decide". For Lehrer not to understand NLP is dumb, and for him to think that NLP actively negates a person's sense of taste is even dumber (and now I'm wondering if How We Decide is worth reading).

People can be influenced to say and do all sorts of things using NLP. If a test subject eats dog crap wrapped in a burrito and the experimenter uses the right NLP techniques afterward (certain auditory or visual cues), then the subject will probably repeat whatever the tester wants him to (i.e. that the dog crap burrito tasted like powdered sugar). This doesn't prove that the subject's taste buds are "dumb", it only proves that NLP is a much more powerful influencer than taste.

Is it a big surprise that we're more influenced by visual and auditory cues than olfactory or gustatory ones? Again, to someone like Lehrer this shouldn't be a surprise, and certainly shouldn't be something worth writing about. But the last few lines in his column contain a whole concoction of ways NLP affects people when they're dining out and it's worth reading for that alone (even if Lehrer doesn't know it):

[T]his is why the ambience of a restaurant matters... For instance, when we eat a meal in a fancy place, full of elaborate place settings, fine porcelain and waiters wearing tuxedos, the food is going to taste different than if we ate the same food in a cheap diner.... [T]he music matters, but so does everything else. The tongue is easy to dupe.

Message from Anonymous to Wall St. and the Protesters

2011-11-03T00:26:00.001-04:00

Wall Street... you sit before your trading screens, before your analysis, you are the players of the game, and you play very well. You rig the game even better. You care very little for the lives of average Americans, mere pawns. But you have strongly misread the world. Your complete lack of passion for your fellow man has left you with a grave error. The game is over Wall Street...

This is our Arab Spring, this is our time. Protesters, savor the smell of tear gas. Savor the feeling of pepper spray. Rejoice to your bruises and your tears. You are our generation's counterculture. You are our martyrs. Clench your fists and grind your teeth. Do not be moved and you will have fire breathed into you. Smile at the police. Ignore the pundits. The worse it gets, the stronger you become. The more hopeless your movement looks, the closer you are to success. You will be written into history. You will be backed up. We will not let your cries go idle. We will not allow your fire to be smothered.

We are Anonymous.

Anti-Oligarchy is not Anti-Capitalism

2011-10-19T17:50:00.015-04:00

Reports in the media (and most conservatives, natch) have been attempting to label the OWS movement as anti-capitalist, and the label seems to be catching on, but nothing could be further from the truth. What "We Are the 99%" clearly and directly signifies is that OWS is anti-oligarchy, not anti-capitalism. And anti-oligarchy is easily the best label for the movement.

Oligarchies have always been, and will always be, the greatest enemy of collective social good. Oligarchies concentrate power in the hands of the few, disempower the rest and impose their rule upon the masses. Throughout most of recorded history, oligarchies governed the masses directly -- as divine monarchs, as non-democratically-elected dictators, or as the heads of religious nation-states (and sometimes as a combination of all three).

Monarchies are nothing more than oligarchies that allow families to remain in power. Theocracies are oligarchies that allow a few, connected, true-believers to remain in power. Dictatorships are non-elected oligarchies that allow a few friends to remain in power through military force, police control and propaganda.

But the enlightenment brought about the end of those types of oligarchic rule for western European nations and the United States. A transparent, representative democracy, with strict, unbreakable term limits, and inalienable human rights has forever removed the possibility of direct rule by a monarch or dictator. And the separation of church and state has forever removed the possibility of a theocracy coming to power by some state-issued decree.

But oligarchies refuse to die, and the power hungry will always seek more power. Having lost the ability to rule with military force, police control or government decree, capitalistic oligarchies instead try to rule by wealth. Thirty years ago the growing capitalistic oligarchy in the United States began using its small concentration of wealth to influence the government to favor it. The pro-oligarchy government of Reagan proved extremely pliable and the oligarchy grew more wealthy as the government titled playing fields in its favor. This larger concentration of wealth allowed the oligarchy to buy still more government influence, which allowed it to consolidate even more wealth and the cycle continued unabated for the last thirty years.

Our current oligarchy found corruptible, money-hungry politicians on both sides of the political aisle, but its strongest ally has undoubtedly been the modern GOP. In the last three decades the Republican Party has proven itself pro-oligarchy in absolutely everything it does--and not just in its capitalist wing, but in its theocratic wing as well (though often it seems GOP leaders pander to the theocrats). These two factions sometimes clash as the oligarchic heads of both groups try to assert and assume power over the other, but both have found a very sympathetic ally in the GOP; a political party that now proudly announces declares itself the defender of the powerful against the weak.

The GOP appointed a steady stream of pro-oligarchy federal judges who eventually ruled that powerful, oligarchic corporations (both foreign and domestic) could use their concentrated wealth, money and power to influence our democratic elections. The modern GOP has also proposed, and enacted, a never-ending stream of pro-oligarchy tax schemes that takes money from the poor to give to the rich. And Republicans have busted unions and removed the regulations that kept capitalistic oligarchies in check for nearly fifty years.

All of the GOP's pro-oligarchy deregulating, union-busting and regressive-lawmaking sabotaged the work that FDR, a traitor to his oligarchy, put in place. The rules, regulations and social programs instituted during his administration helped the United States experience the strongest two decades of economic growth in its history.

FDR, like millions of others, fought against the run-amok, capitalistic oligarchy because all oligarchies are unfair. All oligarchies destroy and damage social order. All of them make life worse, not better. All of them ruin lives. Which means that no oligarchy will be readily accepted by the masses without the strategic use of deception, lies, suppression of knowledge and propaganda. And the GOP-assisted, capitalist oligarchy's use of all four today is no different.

So beware when the oligarchy tells you that the OWS movement is anti-capitalist. Beware the oligarchy telling you that big government is what you should fear. Beware the oligarchy telling you not to rely on an ineffective government--especially when the oligarchy is the one that has worked so hard to make it so.

Remember that a transparent, representative democracy of the people, with strict, unbreakable term limits and inalienable human rights, has forever removed the possibility of direct rule over the masses by dictators and theocrats. And, since this is the case, remember that the oligarchy opposes progressive taxation, regulations, health care, strong unions and everything else it labels "big government" because those things are direct threats to the oligarchy's power, not yours.

Easterbrook is Still an Idiot

2011-10-15T01:30:00.000-04:00

Well my last three posts have now been anti-Easterbook, but really, I'm not planning this, I've just been busy and he's been the guy who's been making my blood boil the most recently. And, in any case, this fisking isn't courtesy of me, it comes from Andrew Gelman who, unfortunately, seems to have discovered Gregg Easterbrook for the first time:

I don't know when I've seen political writing quote so misinformed as this. It's a bizarre mixture of cliches, non-sequitors, and outright mistakes. The author is Gregg Easterbrook and he's writing for Reuters.

At this point in the 1992 election cycle, the elder George Bush held an 89 percent approval rating. . . . Clinton beat a popular incumbent with a fantastic approval rating. For the 2012 election, Barack Obama is just as vulnerable as the elder Bush, if not even more so. Obama currently has an approval rating of 23 percent.

This is all fine, except that:

1. It's not true that at this point in the 1992 election cycle, the elder George Bush held an 89 percent approval rating.

2. It's not true that Obama currently has an approval rating of 23 percent.

Now let's move from Easterbrookworld to reality.

1. According to Gallup, on 13 Oct 1991, George H. W. Bush's ratings (data from the Roper Center) were 66% approve, 28% disapprove, 7% no opinion (not adding to exactly 100% due to roundoff error, I assume).

2. Gallup estimates Obama's job approval as of 11 Oct 2011 as 38%.

So where did Easterbrook get his numbers? 89% was George H. W. Bush's highest approval rate ever, and it was at the beginning of March 1991. As for Obama's 23%, this comes from a Rasmussen report that Easterbrook linked to but misread: 28% "strongly approve" of Obama's job performance but about 45% approve in total, according to Rasmussen's own graph.

But wait, there's more! Easterbrook continues:

But don't sell Huntsman short because he is low in the polls - Obama had been at that point, too.

That would be interesting-if true. But at this point Easterbrook is 0 for 2 on truth, so I'm not inclined to trust him. Instead, I'll look the numbers up myself. Luckily I have an internet connection:

As of 14 Oct 2011, Gallup gives Huntsman 2% support among Republicans. That puts him behind the leaders: No Opinion and Mitt Romney (tied at 20% each), Herman Cain, Rick Perry, Ron Paul, Newt Gingrich, and Michele Bachman. Rick Santorum is ahead of Huntsman, for chrissake. Google that, pal!

What about Obama? How was he polling in October, 2007? He was in second place with 21% support (compared to Hillary Clinton at 50%). So, yeah, anything could happen-but there's a big difference between 21% and 2%.

The real mystery here is how this got published by Reuters. They're a reputable news organization, right?

Easterbrook is listed as "a contributing editor to The Atlantic, The New Republic and The Washington Monthly, a former visiting fellow at the Brookings Institution and distinguished fellow of the Fulbright Foundation, and writes the Tuesday Morning Quarterback column for ESPN."

P.S. I found the George H. W. Bush approval ratings by Googling. It's a great trick. Maybe one of Easterbrook's editors at Reuters could tell him about it.

P.P.S. Why do I waste my time commenting on this stuff? We spend so much time gathering and understanding these data, it's just depressing to see people just make poop up and then spread it around like this. I guess it's like tenure in academia. A tenured professor can do (almost) anything he wants and still get paid to teach classes. Similarly, Easterbrook is so well-connected that he can continue publishing forever in top outlets. I can only assume that nobody edits his pieces for content, just as nobody sits in on my classes to check that I'm actually teaching what I say I am. All Easterbrook has to do is show up on time and he gets the job.

I know some people criticize Thomas Friedman (say) on the same grounds, that he can just publish whatever half-baked ideas he wants and get it in the New York Times. But I think Easterbrook is much much worse than Friedman. Friedman's speculations are often interesting, whereas Easterbrook is just spouting cliches that would make Theodore H. White spin in his grave. And supporting it with numbers that are so wrong as to be beyond garbled. Can't Easterbrook do like a real journalist and interview some cab drivers or something?

I like Reuters and although I blame them for allowing Easterbrook to write anything and still call himself an expert at Brookings when he's not, I think they have time to learn. After all the same organization that employs Felix Salmon, can't also employ (for long) Gregg Easterbrook. Can it?

Easterbrook's Stupidity Makes My Eyes Bleed

2011-09-29T12:37:00.000-04:00

Gregg Easterbrook writes a blog post today (I've linked to it, but please for the love of God, plese don't go read it, it's unusually moronic, even for an Easterbrook post). Here, I'll summarize Easterbrook's commentary on the recession thusly:

1.) Democrats are demanding government spending to help fix the economy. But that's what Democrats always demand and it hasn't worked.

2.) Federal government spending has risen dramatically since 2008 (due to the stimulus) so Paul Krugman is an idiot for pointing out that government spending has decreased.

3.) The whole problem with the economy is pessimism and the only fix is optimism. Once people become optimistic again, the economy will turn around.

Let's start the fisking shall we?

Point 1: Do Democrats always demand government spending? Of course not. Only a complete idiot would say this. When the economy is healthy, Democrats do not demand government spending. But when interest rates are at 0.0%, and have been at 0.0% for three years but still haven't pushed the economy out of its recession, that's when Democrats demand government spending. Nevermind that this is textbook macroeconomics.

Point 2: Do I really need to correct this point? Let me just re-write what Easterbrook said once more for you.

"Federal government spending has gone up since 2008, so Paul Krugman is an idiot for pointing out that total government spending (which includes both federal and state spending) has decreased. He has named that 'austerity'. Hahaha, look at what an idiot that man is. Hahahaha."

Point 3: Do I really need to correct this point either? This 'lack of optimism' crap is basically the same line of thinking that wingnuts use as a reason for being in a recession. But they limit it to businesses and say we're in a recession because businesses lack confidence. This talking point has been fisked and fisked and fisked and fisked until it can't be fisked anymore. But here is the most recent, point-by-point destruction by Larry Mishel.

So that's it. That's Easterbrook's column today. Everything in it (and I mean EVERY SINGLE THING in it) is so wrong that it would be laughable if it weren't for the fact that Easterbrook is somehow a popular and respected "centrist" columnist.

And I'm not going to apologize for my ad-hominem attacks on this nitwit. His blog posts tend to make my eyes bleed, but after reading this most recent one I went through a fifteen minute stretch where I thought I might never recover my eyesight again. Suffice it to say that the world would be better off if Easterbrook never put printed word to page ever again.

Libertarian Hackery - Gregg Easterbrook, Vol 2

2011-09-08T13:22:00.001-04:00

Easterbrook writes a blog post on Reuters today and proves that he doesn't know how to calculate GDP, but that doesn't stop him from writing about it nonetheless (there are a lot of things wrong with Easterbrook's post, but I'll concentrate on just this one most glaring of mistakes).

Firstly, let me explain the calculation of GDP. It's an easy calculation and shouldn't intimidate anyone. GDP equals C+I+G+NX.

What that means is that GDP equals private consumption (C) plus investment (I), plus government spending (G) plus net exports (which is imports minus exports). This is an accounting equation which means it must balance. I'll repeat that again. The calculation of GDP is an accounting equation that must balance (it's also an equation that anyone who's taken a Macro 101 course would have learned on the first day).

I highlighted government spending above because, as Libertarian Hacks are wont to do, Easterbrook tries to claim that federal government spending (in this case, construction spending) doesn't contribute to GDP. He says federal government construction spending is wasteful and slow, which means (obviously) that it cannot contribute to GDP.

But for Easterbook to be right, that would mean that any money the federal government spends on construction just disappears into thin air. Literally, it just disappears. I'm not sure if space aliens or magical wizards took it, but it's gone. And seriously, this is what Easterbrook is claiming.

What he insinuates (but doesn't prove, by the way) is that federal government construction money goes into the pockets of contractors who work slowly, inefficiently and come in over budget, and might even be outright crooks. But even if that were absolutely true and Easterbrook proved it were true, the money still wouldn't have magically evaporated. It would have been paid to someone. And economics (and the GDP calculation) don't care whether the people who take government money are inefficient workers, crooked cheats or pathologically lazy contractors. They're still people and they're still economic actors. So economics (and the GDP calculation) only care that another dollar has been put into circulation. And government spending, therefore, contributes to GDP, no matter where the money goes or who it goes to.

I can illustrate this most plainly with the end of the Great Depression. WWII pulled the country out of the Great Depression and it did so because it forced the country into a massive round of federal government spending (some of which started with the New Deal, but really the depression was wiped out completely and totally by government spending on the war effort). So if you're a Libertarian Hack, and you want to claim that government spending doesn't contribute to GDP or can't pull us out of the current recession because government spending is "wasteful", you have to willfully ignore the fact that the federal government didn't spend a dollar on anything economically useful in the run up to the war. All those tanks, planes and bombs could have been built and dumped into the ocean for all the economic good they did.

WWII was quite possibly the greatest example of Keynes' "money hole". It was wasteful government spending that pulled the country out of a depression. Should we repeat that now? Probably not. Keynes advocated spending money on economically useful projects (bridges, roads, dams etc.), but in the absence of that, even burying money in jars at the bottom of a hole and getting workers to dig it out would work. And WWII proved him right.

But Easterbrook dismisses history, macroeconomics and accounting in service to being a Libertarian Hack of the First Order. And we're all worse off for having to read whatever he spews.

Reflections of a GOP Operative

2011-09-07T17:32:00.000-04:00

Mike Lofgren was a Republican staffer for thirty years. His written a piece that lays out what most of us have known for a while -- that the modern GOP is out to destroy the government, and the country with it. Most of what Lofgren writes was covered in more detail in Thomas Frank's book The Wrecking Crew. I recommend reading both Frank's book and Lofgren's article. I've summarized a large chunk of Lofgren's article here, but I still recommend you click through and read the whole thing.

To millions of Americans who... watched with exasperation the tragicomedy of the debt ceiling extension, it may have come as a shock that the Republican Party is full of lunatics. To be sure, the party, like any political party on earth, has always had its share of crackpots... but the crackpot outliers of two decades ago have become the vital center today.

I could see as early as last November that the Republican Party would use the debt limit vote... to concoct an entirely artificial fiscal crisis. Then, they would use that fiscal crisis to get what they wanted, by literally holding the US and global economies as hostages...It should have been evident to clear-eyed observers that the Republican Party is... an apocalyptic cult... This trend has several implications, none of them pleasant.

Virtually every bill, every nominee for Senate confirmation and every routine procedural motion is now subject to a Republican filibuster. Under the circumstances, it is no wonder that Washington is gridlocked: legislating has now become war...

A couple of years ago, a Republican committee staff director told me candidly (and proudly) what the method was to all this obstruction and disruption. Should Republicans succeed in obstructing the Senate from doing its job, it would further lower Congress's favorability rating... By sabotaging the reputation... of government, the party that is against government would come out the winner.

[It is a] psychologically insightful [tactic] that plays on the weaknesses both of the voting public and the news media. There are tens of millions of low-information voters... [whose] confusion over who did what allows them to form the conclusion that "they are all crooks," and that "government is no good,"... This ill-informed public cynicism... further intensifies the long-term decline in public trust in government.

The media are also complicit in this phenomenon... Inside-the-Beltway wise guy Chris Cillizza...wrote that the institution of Congress was a big loser in the [debt ceiling] fracas, which is, of course, correct, but then he opined: "Lawmakers - bless their hearts - seem entirely unaware of just how bad they looked during this fight and will almost certainly spend the next few weeks (or months) congratulating themselves on their tremendous magnanimity." Note how the... deprecation falls... on those who precipitated the needless crisis and those who despaired of it. He seems oblivious that one side... has deliberately attempted to damage the reputation of Congress to achieve its political objectives.

This constant drizzle of "there the two parties go again!" stories... combined with the hazy confusion of low-information voters, means that the long-term Republican strategy of undermining confidence in our democratic institutions has reaped electoral dividends.

But if this technique falls short... there are other even less savory techniques upon which to fall back.... Republicans... have systematically attempted to make it more difficult to vote: by onerous voter ID requirements (in Wisconsin, Republicans have legislated photo IDs while simultaneously shutting Department of Motor Vehicles (DMV) offices in Democratic constituencies while at the same time lengthening the hours of operation of DMV offices in GOP constituencies); by narrowing registration periods; and by residency requirements that disenfranchises university students.

[T]he deindustrialization and financialization of America since about 1970 has spawned an increasingly downscale white middle class - without job security (or even without jobs), with pensions and health benefits evaporating and with their principal asset deflating in the collapse of the housing bubble. Their fears are not imaginary; their standard of living is shrinking.

While Democrats... dismissed [those] fears... Republicans went to work.... the business wing of the Republican Party consists of the most energetic outsourcers, wage cutters and hirers of sub-minimum wage immigrant labor to be found anywhere on the globe. But the faux-populist wing of the party... played on the fears of the white working class to focus their anger on scapegoats that do no damage to corporations' bottom lines: instead of raising the minimum wage, let's build a wall on the Southern border (then hire a defense contractor to incompetently manage it). Instead of predatory bankers, it's evil Muslims. Or evil gays. Or evil abortionists.

How do they manage to do this? Because Democrats... do not understand language. Their initiatives are posed in impenetrable policy-speak: the Patient Protection and Affordable Care Act. The what? No wonder the pejorative "Obamacare" won out. Contrast that with the Republicans' Patriot Act. You're a patriot, aren't you? Does anyone at the GED level have a clue what a Stimulus Bill is supposed to be? Why didn't the White House call it the Jobs Bill and keep pounding on that theme?

You know that Social Security and Medicare are in jeopardy when even Democrats refer to them as entitlements... Why not call them "earned benefits," which is what they are because we all contribute payroll taxes to fund them? That would never occur to the Democrats. Republicans don't make that mistake; they are relentlessly on message.

After a riot of unbridled greed... by Wall Street and its corporate satellites, where is the popular anger directed? At "Washington spending" - which has increased primarily to provide unemployment compensation, food stamps and Medicaid to those economically damaged...

The Republican Party of 2011 believes in three principal tenets...

1. The GOP cares solely and exclusively about its rich contributors... they... cannot abide so much as a one-tenth of one percent increase on the tax rates of the Walton family or the Koch brothers, much less a repeal of the carried interest rule that permits billionaire hedge fund managers to pay income tax at a lower effective rate than cops or nurses.

John Boehner is fond of saying, "we won't raise anyone's taxes," as if the take-home pay of an Olive Garden waitress were inextricably bound up with whether Warren Buffett pays his capital gains as ordinary income or at a lower rate. Another chestnut is that millionaires and billionaires are "job creators." US corporations have just had their most profitable quarters in history; Apple, for one, is sitting on $76 billion in cash, more than the GDP of most countries. So, where are the jobs?

...Republicans have assiduously spread the myth that Americans are overtaxed. But compared to other OECD countries, the effective rates of US taxation are among the lowest. In particular, they point to the top corporate income rate of 35 percent as being confiscatory... But the effective rate is much lower. Did GE pay 35 percent on 2010 profits of $14 billion? No, it paid zero.

2. They worship at the altar of Mars. Democrats... can never match GOP stalwarts... in their sheer enthusiasm for invading other countries. [John] McCain wanted to mix it up with Russia - a nuclear-armed state - during the conflict with Georgia in 2008... while Lindsey Graham has been persistently agitating for attacks on Iran and intervention in Syria. And these are not fringe elements of the party; they are the leading "defense experts"... Militarism springs from the same psychological deficit that requires an endless series of enemies, both foreign and domestic.

3. Give me that old time religion. Pandering to fundamentalism is a full-time vocation in the GOP. Beginning in the 1970s, religious cranks ceased to be a minor public nuisance... but grew into the major element of the Republican rank and file.... Also around us is a prevailing anti-intellectualism and hostility to science.

[H]ow did the whole toxic stew of GOP beliefs - economic royalism, militarism and culture wars cum fundamentalism - come completely to displace an erstwhile civilized Eisenhower Republicanism? [T]he rise of politicized religious fundamentalism... may have been the key ingredient of the takeover... Politicized religion... rationalizes...all three of the GOP's main tenets.

If you are wealthy, it is a sign of God's favor. If not, too bad! But don't forget to tithe in any case. This rationale may explain why some economically downscale whites defend the prerogatives of billionaires.

The GOP's fascination with war is also connected with the fundamentalist mindset. The Old Testament abounds in tales of slaughter... This... has led to such phenomena as Jerry Falwell once writing that God is Pro-War.

I left [the GOP] because I was appalled at the headlong rush of Republicans... to embrace policies that are deeply damaging to this country's future... Having gutted private-sector pensions and health benefits... the GOP now thinks it is only fair that public-sector workers give up their pensions and benefits, too.... Under the circumstances, it is simply safer to be a current retiree rather than a prospective one.

If you think Paul Ryan and his Ayn Rand-worshipping colleagues aren't after your Social Security and Medicare, I am here to disabuse you of your naiveté. They will move heaven and earth to force through tax cuts that will so starve the government of revenue that they will be "forced" to make "hard choices" - and that doesn't mean repealing those tax cuts, it means cutting the benefits for which you worked.

If Republicans have perfected a new form of politics that is successful electorally at the same time that it unleashes major policy disasters, it means twilight both for the democratic process and America's status as the world's leading power.

Listen to the Markets!

2011-09-06T20:51:00.000-04:00

Martin Wolf thinks governments should listen to the markets and spend:

Martin Wolf (FT):

"[L]isten to the markets. They are saying: borrow and spend, please... US 10-year Treasuries yielded 1.98% on Monday, their lowest for 60 years... fiscal deficits help the private sector deleverage. Fiscal deficits are helpful... in a balance-sheet contraction.

One objection... is that people will fear higher future taxes and save more... But there is a good answer: use cheap funds now to raise future wealth and improve the fiscal position in the long run. It is inconceivable that creditworthy governments would be unable to earn a return above [1.98% for ten years]... by investing in physical and human assets.

Another noteworthy objection... is that growth slows sharply once public debt exceeds 90% of GDP. Yet that is a statistical relationship, not an iron law. In 1815, UK public debt was 260% of GDP. What followed? The industrial revolution.

It is becoming ever clearer that the developed world is making Japan's mistake of premature retrenchment during a balance-sheet depression, but on a more dangerous scale... In a world of excess saving, the last thing we need is for creditworthy governments to slash their borrowings. Markets are loudly saying exactly this. So listen."

Joseph Stiglitz Examines US War Costs

2011-09-02T00:49:00.001-04:00

His column from Project Syndicate:

The Price of 9/11 - Joseph Stiglitz

"[The] attacks by Al Qaeda were meant to harm the United States, and they did, but in ways that Osama bin Laden probably never imagined.... Bush's response to the attacks compromised America's basic principles, undermined its economy, and weakened its security. The attack on Afghanistan... was understandable, but the subsequent invasion of Iraq was entirely unconnected to Al Qaeda... that war quickly became very expensive... When Linda Bilmes and I calculated America’s war costs three years ago, the conservative tally was $3-5 trillion. Since then, the costs have mounted further.

Even if Bush could be forgiven for taking America... to war on false pretenses, and for misrepresenting the cost... there is no excuse for how he chose to finance it. His was the first war in history paid for entirely on credit. As America went into battle, with deficits already soaring from his 2001 tax cut, Bush decided to plunge ahead with yet another round of tax “relief” for the wealthy.

Increased defense spending, together with the Bush tax cuts, is a key reason why America went from a fiscal surplus of 2% of GDP... to its debt position today. Moreover... disruption in the Middle East led to higher oil prices, forcing Americans to spend money on oil that they otherwise could have spent buying goods produced in the US.

Ironically, the wars have undermined America's (and the world's) security... an unpopular war would have made military recruitment difficult in any circumstances. But Bush... underfunded the troops, refusing even basic expenditures... or adequate health care for returning veterans.... Military overreach has predictably led to nervousness about using military power... but America's real strength, is its "soft power," its moral authority. And this, too, was weakened as the US violated basic human rights... and its longstanding commitment to international law was called into question.

The wars' collateral damage has been massive: by some accounts, more than a million Iraqis have died... [and] America's military spending still nearly equals that of the rest of the world combined.... Some of the increased expenditures went to the costly wars in Iraq and Afghanistan... but much of it was wasted on weapons that don't work against enemies that don't exist.

Al Qaeda, while not conquered, no longer appears to be the threat that loomed so large... but the price paid in getting to this point... has been enormous – and mostly avoidable. The legacy will be with us for a long time. It pays to think before acting."

The question is not "can" the economy be saved, but "will" it.

2011-09-01T20:42:00.000-04:00

Martin Wolf:

Struggling With a Great Contraction - (FT)
"Many ask whether high-income countries are at risk of a "double dip" recession. My answer is: no, because the first one has not ended. The question is, rather, how much deeper and longer this recession... might become. By the second quarter of 2011, none of the six largest economies had surpassed... their 2008 [output levels]... In the US, unemployment is still double its pre-crisis rates.

In neither the US nor the eurozone, does the politician in charge... appear to be much more than a bystander of unfolding events... Obama wishes to be president of a country that does not exist. In his fantasy, US politicians bury differences in bipartisan harmony. In fact, he faces an opposition that would prefer the country to fail, rather than the president succeed...

In the long journey to become ever more like Japan, the yields on 10-year US and German bonds are now down to where Japan's had fallen in October 1997... does deflation lie ahead...? That seems... to be a more plausible danger than the hyperinflation those fixed on fiscal deficits find so terrifying. [The] huge fight over US fiscal policy... has caused a run into, not out of, US government bonds. Meanwhile, stock markets have taken a battering... Nouriel Roubini, also known as "Dr Doom", predicts a downturn... yet he is surely right that the buffers have mostly gone: interest rates are low, fiscal deficits are huge and the eurozone is stressed. The risks of a vicious spiral from bad fundamentals to policy mistakes... are large.

Yet all is not lost. In particular, the US and German governments retain substantial fiscal room for maneuver--and should use it. But, alas, governments that can spend more will not and those who want to spend more now cannot. Again, the central banks have not used up their ammunition. They too should dare to use it... the key, surely, is not to approeach a situation as dangerous as this one within the boundaries of conventional thinking."

I get it... but also, it seems kinda dumb

2011-08-31T17:18:00.000-04:00

So this couple has now set a hypermile record 88-times. Hypermiling is a form of driving that maximizes miles per gallon. The couple managed to average 65 mpg over the course of 9,000 miles in a stock Chevy Cruze, and they're out to show the world that lots can be done to maximize your miles per gallon. When they're not busy driving, they're lobbying governments to increase fuel efficiency standards, or they're teaching hypermiling techniques to interested people.

I understand the premise behind this couple's hypermile exploits. Helen and John Taylor (said hypermile record-holding couple) think it would be good for the environment if we all learned to hypermile. But I have to wonder if the two of them have ever paused to think that they're driving unnecessarily when setting their records. And I've got a pretty good feeling that curbing unnecessary driving will do a lot more to help than if we all learned how to hypermile.

Look, I get it. Better fuel efficiency will control runaway greenhouse gas emissions and lobbying governments to raise fuel efficiency standards is probably the biggest and best step we can take. But driving unnecessarily to try to encourage others to drive more efficiently? On balance, that's probably a net negative. And if the Taylors were really serious about saving the planet, I think they could do more good if they drew attention to unnecessary driving. Encouraging people not to hop in the car for a quick trip to a 7/11 that's less than a few miles away, by walking, taking public transit, or riding a bicycle would do more to further their goals.

All they're doing now is adding completely unnecessary pollution to the atmosphere while pointing out that people are adding completely unnecessary pollution to the atmosphere.

Libertarian Hackery

2011-08-30T15:31:00.000-04:00

Holy schmoley does the book trailer video to Sylvia Nasar's new book look terrible. Is there anything more blatantly wrong than half of what this trailer espouses? How did Nasar do so well writing A Beautiful Mind but get things so wrong with this book? Now, admittedly, I haven't read it, but do I really have to? The book trailer credits Herbert Hoover for bringing the country out of the Great Depression, and attacks John Maynard Keynes' personal investment mistakes leading up to the Great Depression... mistakes which probably helped him better understand economics and led him to write General Theory.

Where did I find this link? In another awful ESPN article written by Libertarian Hack of the First Order, Gregg Easterbrook. I tried to comment on the article, but my comment was deleted. Which means ESPN / Disney think it's fine for one of their writers to spew nonsensical economic and political comments in an article, but it's not okay for their readers to comment on it.

Interesting.

Missing Data

2011-08-23T18:11:00.000-04:00

Karl Smith has a post up about the Lesser Depression and why it "feels" different than previous ones. He points out that the loss of jobs, not the loss of real wealth, is the reason this one is so bad. He puts in a bunch of graphs that show that wealth per person, even adjusted for inflation, is higher today than it was during the boom years of the 1990s.

He says:

"The reason this time is so painful is because there is a dearth of jobs, not value... lack of jobs is why everyone feels bad, not because they have less or are poorer..."

Well, there's a missing data set that I think would probably implode Smith's observation and that's the income distribution in this country. We all know the rich have gotten richer, the poor have lost jobs and the middle class has stayed the same. I don't have time to go out and find the full data set for the chart below (hey, the 2010 census results should be up in a year or two) but what do you want to guess we'll see that the 80th percentile and lower groups will have remained flat on their incomes?

When Smith says that everyone feels bad, "... not because they have less or are poorer..." I think he's seriously wrong. Most of us do have less in real dollar terms than we did in 2000, while the rich have a ton more and the poor have no jobs. That's why we feel bad.

Journamalism - WSJ Stephen Moore Edition

2011-08-20T14:51:00.000-04:00

Stephen Moore writes an op/ed in the WSJ that's one of the most blatant pieces of journamalism (mixed with economalism) that I've ever seen. Karl Smith, David Glasner and Paul Krugman do the heavy lifting with a quick thought by me at the end.

First, Stephen Moore's editorial, Why Americans Hate Economics:

"I'm surprised how many students tell me economics is their least favorite subject. Why? Because too often economic theories defy common sense... When [WSJ writer] Laura Meckler... dared to ask the White House how increasing unemployment insurance "creates jobs"... she received this slap down: "I would expect a reporter from the WSJ would know this as part of the entrance exam just to get on the paper."

[The White House] explained to her that unemployment insurance "is a... direct way to infuse money into the economy because people who are unemployed... are going to spend the money they get... and that creates growth and income for businesses that lead... to making decisions about jobs--more hiring."

That's a perfect Keynesian answer, and also perfectly nonsensical. What the White House is telling us is that the more unemployed we can pay for not working, the more people will work. Only someone with a Ph.D. in economics from an elite university would believe this.

I have two teenage sons. One worked all summer and the other sat on his duff. To stimulate the economy, the White House wants to take more money from the son who works and give it to the one who doesn't. I can say with 100% certainty as a parent in the Moore household this will lead to less work.

Or consider the biggest whopper: Mr. Obama's thoroughly discredited $830 billion stimulus bill... We were promised... "multipliers" from every dollar the government spent. There was never any acknowledgment that for the government to spend a dollar, it has to take it from the private economy... the multiplier theory only works if you believe there's a fairy passing out free dollars.

How did modern economics fly off the rails? The answer is that the "invisible hand" of... Adam Smith, got tossed aside for the new "macroeconomics," a witchcraft that began to flourish in the 1930s during the rise of Keynes. Macroeconomics simply took basic laws of economics we know to be true for the firm or family... and turned them on their head..."

Oh goodness, can you feel the stupid? It burns. It really really burns, and I did not enjoy re-posting that, let me tell you.

Anyway, first up, Karl Smith begins the fisking:

"The Moore household is a small, open economy, where imports and exports exceed GDP. Its constituents have almost no internal, currency-denominated trade [with each other] and they hold no assets or liabilities against one another. It does not have its own central bank. It does not operate its own currency and it does not float bonds backed by the central bank. These are important characteristics of the Moore household that do not apply to the US economy."

Next up, David Glasner:

"Moore [says]: "Too often economic theories defy common sense." That's in it a nutshell for Moore: common sense is the ultimate standard of truth... so what's that you say, Galileo? The sun is stationary and the Earth travels around it? And you say the Earth is round? If [so] how could anybody stand at the bottom... and not fall off?... And you Einstein, you say there's a... space-time continuum, so that time slows down as one approaches the speed of light? Away with you!

[My] point is not to disregard common sense... but to recognize that common sense isn't enough. Sometimes things are not what they seem... once you recognize that common sense has its limitations... Moore is exposed... as unwilling to do the hard thinking required to push back the frontiers of [his] own ignorance.

[And] Keynesian [economic] ideas are rooted in certain common-sense notions, for example, the idea that income and expenditure are mutually interdependent, the income of one person being derived from the expenditure of another... so common sense [often] cuts in both directions. Moore likes one [paying people not to work will encourage them not to work] and wants to ignore others... We would like economists... to tell us which effect is stronger or... when one is stronger than the other... But all that would be too complicated and messy for Moore's cartoonish view of the world."

Finally, Paul Krugman:

"What's remarkable [about Moore's piece]... is the all-out embrace of anti-intellectualism. It actually denounces "fancy theories" and rejects them because they "defy common sense". Gosh, if that's the way the right is going, the next thing you know they'll reject the theory of evolution. Oh, wait.

There's a lot to critique... [about] what constitutes common sense. Some people find it commonsensical that if the government puts people to work [via a "thoroughly discredited stimulus bill"], that adds to employment; it takes fancy arguments from the likes of the WSJ to convince them otherwise.

And now I'll add my $0.02. Moore discredits the stimulus multipliers by saying that if the government wants to spend a dollar it needs to take a dollar from the private economy. Here's the problem with that assumption. You must also, rationally, apply that line of logic to the private sector. If every dollar the government spends is a dollar taken out of your pocket, then every dollar Google makes is a dollar taken out of your pocket. Moore's assuming we live in an economy with a fixed amount of money and resources (a barter economy, basically).

Which means that for Apple to make any money they must take it from you, permanently. And the $400 you spent on that iPad you will never have back. You have just sustained a permanent, $400 hit to your worth and unless you sell the iPad, you won't get it back. But we don't live in a barter economy. We live in a much more complex world with a more complex economy than that. And it is decidedly NOT a barter economy.

Links

2011-08-18T20:44:00.000-04:00

1.) Why "Business Needs Certainty" is Destructive - Yves Smith (Salon)

"You've doubtless [heard] the claim that the economy is a mess because of the threat to reregulate in the... wake of the financial crisis. This is propaganda that needs to be laughed out of the room... "Uncertainty" as far as regulations are concerned is not a major [issue]. Surveys show that the "uncertainty" bandied about in the press really translates into "the economy stinks, I'm not a business that benefits from a bad economy, and I'm not going to take a chance when I have no idea when things might turn around."... [But] businesses have [also] had at least 25-to-30 years of near complete certainty--certainty that they will pay lower and lower taxes, that they will face less and less regulation, that they can outsource to their hearts' content... they have also been certain that unions will be weak to powerless, that states and municipalities will give them huge subsidies to relocate... that the financial markets will always look to short term earnings... that the SEC will never investigate anything more serious than insider trading... So this haranguing about certainty simply reveals how warped big commerce has become."

2.) Rick Perry Aggressively Pursued Federal Aid He Now Decries - Michael Scherer (Time)

"Rick Perry burnished his conservative credentials by attacking the idea of deficit stimulus spending... But, back in 2003, lobbyists under Perry's direction [lobbied]... Congress for more than a billion dollars in federal deficit spending on "stimulus". And they won. ...And that was just the beginning... the Texas lobbying campaign won funds for programs that Perry now says he opposes as fiscally irresponsible intrusions on state responsibilities."

3.) Why Cutting the Federal Deficit is a Bad Idea - Daniel Davies

The bad thing about cutting the federal deficit is not that [the cuts] might affect Social Security or Medicare... is not that some other virtuous program might be defunded... is not that it "shinks the state"... is not that it disproportionately falls on the poor... The bad thing about cutting the federal deficit is that unemployment is very high and interest rates are very low... borrowing money to employ currently unemployed resources is really obviously the right thing to do.

4.) The Limitations of Romney's Unemployment Insurance Savings Accounts - Mike Konczal (Rortybomb)

"Mitt Romney argued for replacing our current unemployment insurance with a system of unemployment savings accounts... [a system] that would allow employees to create a savings account while working that has money automatically channeled into it tax-free to be drawn down during periods of unemployment. What are the differences between our current approach and the Romney approach?

First -- savings accounts don't involve... social insurance. There's no risk pooling or sharing risks along large populations in order to take advantage of the traditional benefits of insurance... Part of the point of social insurance is that it is social; we help others and they help us.

Second -- redistribution in the Romney [approach]... is upwards, towards the richest, instead of obviously towards those in need.

Third -- it weakens the power of the unemployed. Unemployment insurance increases the time until the unemployed take their next job... research tells us this is a "liquidity" effect as opposed to a work disincentive effect -- people are taking the time they need in order to find the best job for themselves instead of taking the quickest job in order to make basic payments... By empowering the unemployed and giving them more breathing space to search for the best job also enables them to search for the best wage to go with their job. Switching this system... throws off the balance between workers and bosses in favor of the latter.

Fourth -- it is hard to scale outwards in cases of emergency. In a recession it is very easy to extend unemployment benefits... savings accounts would be difficult to expand in any sense... it takes "automatic stabilizers" out of commission.

Fifth -- it removes the idea of the government from the equation of people dealing with economic risks... people will look at private savings accounts and think that the government isn't doing anything. Even if there are substantial tax benefits people will... ignore this.

Supply & Demand-side Shocks in Business Cycles

2011-08-16T11:55:00.000-04:00

Tyler Cowen and Alex Tabarrok have been going back and forth on a wage stickiness debate with Brad DeLong, Karl Smith and others. I'm not going to wade into that debate, but rather point out that in Tabarrok's most recent hypothetical example, he offers a real business cycle thought experiment that crystallizes the issues most economists have with RBC.

Tabarrok says:

Imagine a farmer whose farm produces 100 bushels of wheat. He hires 10 workers to bring in the wheat, paying each of them 9 bushels. Thus, each worker carries 10 bushels, the wage is 9, the wage bill is 90, and the farmer earns 10.

Now suppose that due to climate change or a swarm of locusts the farm only produces 90 bushels of wheat. If wages were fully flexible then an equilibrium exists in which each worker is paid a wage of 8 leaving the farmer with 10 bushels as before. The farmer doesn’t want to reduce everyone’s wages, however, because that will reduce morale so he fires one worker leaving nine. Each worker now brings in 10 bushels, as before, and is paid a wage of 9, for a total wage bill of 81 leaving the farmer with 9 bushels. The unemployment rate is 10%.

This is RBC in a nutshell. It assumes supply shocks, not demand shocks. And in Tabarrok's thought experiment we have to assume a natural disaster or some other catastrophe has struck and that this is the reason for lower production. Basically, RBC and Tabarrok's thought experiment require that we lower the firm's production possibilities frontier with no possible way to raise it in the short- or medium-term. But that's not a realistic example of what's happening in this economy. Recessions are usually demand-side problems (as is the current one). And it's not a natural disaster that's causing the 'farms' from Tabarrok's thought experiment to cut production. What's caused the drop in production at the country's 'farms' is a burdensome debt load held by the 'farm's' customers. The farm's customers are trying to repair their balance sheets, which means they've cut back on buying as much corn as the farmer usually makes.

And if you view recessions as demand-side shock, rather than supply-side RBC shocks, then you see where Keynesian solutions can really help... for instance, perhaps another employer (the government perhaps?) can step in, hire the unemployed worker (with the practically free money it's currently getting) and, I dunno, build a bridge or a road or something else that might benefit the farmer and/or the farmer's customers. The laid-off worker now has a job, is doing something productive and might even turn around and become a customer of the farmer who buys up the farmer's excess production. In this model, the households repair their balance sheets, the unemployed worker is able to work and create something productive and everyone benefits.

Links

2011-08-15T11:24:00.000-04:00

1.) Mission impossible: stop another recession - Dr. Doom (FT)

"There has been little job creation, weak growth and flat consumption and manufacturing production. Housing remains depressed... Fiscal policy is now contractionary in both the eurozone and the UK... and in the US, state and local authorities, and now, the federal government, [have] cut spending... QE2 produced a growth bump of barely 3 per cent, for one quarter. QE3 will be much smaller, and will do much less."

2.) Do Property Rights Increase Freedom? - Noah Smith (Noahpinion)
"Since the dawn of time, libertarians have equated property rights with freedom... But is that right? What would it feel like to live in a society where almost every single thing is privately owned and priced? Walking around urban Japan, I feel like I am seeing a society that is... close to that ideal... [In Japan] there are relatively few free city parks... there are also very few public benches... Many green spaces are private and gated off... outside your house or office there is basically nowhere to sit down that will not cost you a little bit of money. Public buildings generally have no drinking fountains; you must buy or bring your own water... Does all this private property make me feel free? Absolutely not! Quite the opposite..."

3.) Arctic Ice Thinning 4 Times Faster Than Predicted - Joe Romm (ClimateProgress)
"... analyses of sea ice trends that don't model ice thickness and volume... miss crucial feedbacks... today's winter ice cover is thinner, meaning it breaks up more easily under the influence of winds and currents... smaller chunks of ice drift more quickly and drifting ice is more prone to export and melting at lower latitude.. although it's impossible to say for sure when we might see an ice-free Arctic... things do seem to be getting progressively worse... [we'd] better start with the interventions even earlier. Now."

4.) How Riots Start, and How They Can Be Stopped - Ed Glaeser (Bloomberg)
"During the Republican National Convention in 2004... NYPD arrested more than 1,000 people and let them go. The New York strategy protected the city... Light penalties widely applied and serious penalties applied to a few can both deter unlawful behavior... But in the case of riots, it is awfully hard to actually prove wrongdoing and extremely important to clear the streets. Arresting widely and temporarily is far more effective."

5.) Why Wall Street Should Fear the Tea Party - James Surowiecki (New Yorker)
"... the agreement to lift the debt ceiling... was a clear victory for congressional Republicans, traditionally corporate America's best friends... [but] the spending cuts... hit infrastructure, basic research, and defense--from which corporate America reaps benefits... it's possible that Republicans will block the extension of unemployment and... also be emboldened in their attacks on the Fed, which they argue has been overly loose in its monetary policy (when in fact it's been too tight). The economy needs strong doses of both fiscal and monetary policy. The debt deal makes it more likely that we'll get neither."

Journamalism - Fareed Zakaria Edition

2011-08-14T18:16:00.001-04:00

Zakaria tends to make a lot of mistakes whenever he deigns to write about financial and economic matters. A lot. But I have to admit that he's not totally incapable of learning. I've seen prior Zakaria editorials that have more fallacies and platitudes. However, he makes a huge mistake in his piece today.

The basic gist of today's piece is that China has been complaining about the downgrade and threatening to stop buying US Treasuries. Zakaria believes these threats are hollow--and he's probably right about that. But what he gets colossally wrong is believing that the "threats" are actually threats, rather than being "nice things China might do to help our economy". Which means Zakaria has basically written a Monty Python sketch in which China says:

"Listen up you fat American capitalist pigs... if you don't do what we want, we're going to come over there and poke you with the soft cushions!!!"

That's still a great sketch, by the way, and I've embedded it below. Anyway, moving on... Zakaria's reasons for believing China's threats are actually threats, is because he believes that if China stops buying US Treasuries it will result in "mutually assured destruction". Yikes. There is just so much wrong with that sentiment... here is the relevant passage:

"Imagine that China were to sell off those 1.2 trillion dollars of U.S. Treasury bonds... let's play out the disastrous chain of events that would happen... it would trigger panic selling of the dollar. That would in turn hurt the U.S. economy..."

Okay, let's "imagine" this scenario and play it out. Here are the steps: China sells its Treasury hoard, then stops buying new Treasuries, which means the dollar devalues and gets cheaper relative to foreign currencies. So far, nothing incorrect here (although "selling" rather than "panic selling" would have been more accurate). Where he goes off the rails is in saying that all of this "would in turn hurt the U.S. economy." Um, no. Not in our current situation. In fact, NO PART of any of this is bad for us.

The US is a net debtor nation--meaning domestic consumption hasn't matched exports for quite some time. Correcting that imbalance would go a long way toward mending the economy. And a cheaper dollar would go a long way to making US exports more competitive. So when Zakaria baldly states that panic selling of the dollar would hurt the economy, but doesn't provide a single reason why, you can be sure he's wrong.

It's a widespread mistake that the US needs capital inflows from China to sustain our "addiction to debt" but first I'll let Krugman (and Keynes) explain why needing foreign capital inflows is currently wrong:

"... inflows of capital from other nations simply add to the already excessive supply of U.S. savings relative to investment demand. These inflows [create] a trade deficit that makes America worse off, not better off; if the Chinese, in a huff, stopped buying Treasuries they would be doing us a favor... the fact that... officials and highly regarded economists don't get this, 75 years after [Keynes'] General Theory, represents a sad case of intellectual regression."

So to recap: Zakaria says China's threats to stop buying Treasuries are hollow. But the reality is that China's threats to stop buying Treasuries aren't threats. They're this:

Ahhh journamalism.

Earnings Yield Divergence & Market Distortions

2011-08-13T21:04:00.000-04:00

Felix Salmon asked a question of his readers today. He wanted help in trying to understand what's behind the spread blowing out between the 10-year treasury yield and the stock market's earnings' yield (which is earnings divided by stock price). Since the mid-1970s both yields have tracked each other very well, but recently they've begun to diverge. Prior to the mid-70s however, there was almost no correlation between the two (as Jake over at EconompicData points out) and so I've reproduced Jake's chart below.

There are two things to understand about Jake's chart. First of all, prior to the mid-70s Harry Markowitz and Modern Portfolio Theory had yet to make an impression on portfolio managers. Markowitz first published MPT in 1959, but it would take a decade for it to find traction, acceptance and assimilation with money managers. But once it found acceptance it was so widely implemented that the 10-year and E/P yields tracked each other nearly perfectly until 2003. But before I address the issues behind the divergence since 2003, let me first explain MPT.

MPT is a mathematical system that described the fundamentals of pricing and asset selection for a portfolio that most money managers take for granted today. MPT proved the benefits of diversification and, in a mathematical way, showed there was a direct, linear relationship between perceived risk and return (MPT says that an investor will require another 'unit' of return for taking on another 'unit' of perceived risk). And, as I mentioned, MPT became the bedrock foundation of portfolio management in the 1970s, and Jake's chart clearly shows that. But since 2003 those yields have blown out. Which means that either investors have roundly abandoned MPT and effective asset allocation, or something else is at work. First of all, here's a reproduction of Felix's chart showing the divergence from 2003 to now:

As I said, this chart shows a dramatic shift away from MPT starting in 2003 and Felix wonders why. Has MPT been discredited? Have investors and asset managers become increasingly more risk-averse? Do they perceive much higher risk in equities since the dot-com crash of 2000 and Black October of 2008?

I think not. And Gillian Tett has a better explanation for the divergence:

"The IMF quietly published a ground-breaking paper... around the "cash" that companies, asset managers and securities lenders hold on their balance sheets. Two decades ago, these cash pools were modest, totalling just $100 billion... but these pools have exploded in size, as the asset management sector has consolidated... and companies have centralised their treasury functions. Institutional cash managers now control between $2 trillion and $4 trillion globally... what is striking is where this "cash" has ended up... cash managers have started to avoid banks... the key factor is risk management, not yield... the FDIC only guaranteed $100,000 in any account... cash managers have... cash pools that are so large that effective diversification is impossible... the net result is a shortage of [Treasuries]... Hence the low yields."

The IMF research shows that MPT isn't used by huge, institutional cash managers. They're strictly buying treasuries for cash hoarding purposes. These managers aren't interested in MPT or risk and return, they're only interested in zero risk, absent any return. Tett's article doesn't mention sovereign purchases of Treasuries, yet countries like China have been gobbling up Treasuries for the last decade, which has only further depressed yields. And while that's important, that's not as sinister as the information in Tett's article.

China's purchases of US Treasuries is economically unsustainable and will eventually correct itself, but corporations have been consolidating and combining at record rates, and their consolidations are causing market distortions that probably won't correct. So the IMF research is only adding more proof to the fact that the US is not a small-business-focused country by any stretch, and hasn't been for a long time. Corporations dominate every facet of daily life, and their consolidated and swollen treasuries are now distorting bond yields (in addition to the raft of other facets of daily life they affect). But rather than addressing all of those issues, for now I'll just refer to Felix's great piece on Wall Street's Dead End from the New York Times to illustrate how giant corporations are also making the stock market irrelevant::

"The number of companies listed on the major domestic exchanges peaked in 1997 at more than 7,000, and it has been falling ever since. It's now down to about 4,000 companies, and given its steep downward trend will surely continue to shrink... What the market is not doing so well is its core public function: allocating capital efficiently."

I quoted that last sentence, because 'allocating capital efficiently' was never the goal of any of the corporate-friendly, market-inspired deregulations we've had since Reagan that allowed massive corporations to so rapidly consolidate. Rather, the singular policy goal of every faithful Reaganite conservative has always--and only ever--been the further concentration and consolidation of wealth into the hands of the few. The crash in bond yields, just like the rapid decrease in the number of companies listed on US stock markets, is no longer a symptom of a growing problem, but a testament to the overwhelming success these policies have had, are continuing to have, and will continue to have into the foreseeable future.

This post isn't the place for me to discuss all the ways that continued concentration of wealth degrades society and the economy, but suffice it to say that the two issues I've discussed in this post alone (depressed bond yields and an increasingly irrelevant stock market) have already had damaging effects on the daily lives of wide swaths of the population.

Links

2011-08-13T13:59:00.000-04:00

1.) Cash-rich investors choose crazy Treasury returns - Gillian Tett (FT)

"... the “cash” which companies, asset managers and securities lenders held on their balance sheets two decades ago... were modest, totalling just $100bn across the globe... but in recent years, these pools have exploded in size... institutional cash managers now control between $2,000bn and $4,000bn globally...what is more striking is where this “cash” has ended up. Two decades ago, it typically was placed in bank accounts. But... in 2007... just 16-20 per cent of these funds were on deposit. Why? ... the key factor was risk management, not yield. From 1990 up to the crisis, US Federal Deposit Insurance Corporation only guaranteed the first $100,000 of any account. And while cash managers have tried to use multiple banks, their cash pools are so large that effective diversification is impossible."

2.) Stop Panicking About Our Long-Term Deficit Problem. We Don't Have One. - James K. Galbraith (TNR)

"... the president... majorities in Congress... all have embraced the “long-term deficits” which appear in the projections as though they were foreordained history... but there isn’t, in fact, a “long-term deficit problem.” So long as interest rates stay below the growth rate, as they are, debt-to-GDP levels eventually stabilize and even decline. The notion that there is a big problem is pure propaganda based on a pseudo-debate... so what is to be done? Nothing [will] happen until ideas change... and the first change must be to challenge and reject all the nonsense about long-term budget deficits, national bankruptcy or insolvency, and even “fiscal responsibility” that we are hearing. The entire object of this propaganda campaign is to cripple government—including regulation and the courts—and to roll back Social Security, Medicare, and Medicaid. The defense of those successful, effective—and yes, sustainable—programs just became far more difficult, and perhaps impossible..."

3.) Why S&P's Ratings Are Substandard and Porous - Nate Silver (NYT)

"S.&P.’s bond ratings from five years ago would have told you almost nothing about the risk of a default today. They had no insight about the threats in European markets, nor about which countries in Europe were relatively more likely to default... by comparison, simply looking at a country’s ratio of net debt to G.D.P. would have been a better predictor of default... it only explains about 12 percent of default risk... still, this simple statistical indicator does better than the S.&P. ratings."

4.) On S&P, Downgrades, and Idiots - Economics of Contempt

"S&P was flat-out wrong — no caveats. They are, to put it very bluntly, idiots, and they deserve every bit of opprobrium coming their way. Look, I know these guys... back when I was an in-house lawyer for an investment bank, I had extensive interactions with all three rating agencies. We needed to get a lot of deals rated, and I was almost always involved in that process... to say that S&P analysts aren’t the sharpest tools in the drawer is a massive understatement... before meeting with a rating agency, we would plan out our arguments... with S&P, it got to the point where we were constantly saying, “that’s a good point, but is S&P smart enough to understand that argument?” I kid you not, that was a hard-constraint in our game-plan."

5.) The EPA: the Tea Party's next target - Diane Roberts (The Guardian)

"Republicans are going after the EPA. It's a "job-killer". America's high unemployment rate is not the fault of the worldwide recession or the housing bubble or... two unfunded wars on top of George W Bush's silly tax cuts for the rich, it's those damned DC bunny-huggers.... Michele Bachmann... advocates abolishing the EPA as soon as God puts the Tea Party in charge. She blames it for a host of anti-free market evils... to the "hoax" that is global climate change. The bill funding EPA... is a dirty bomb, meant to destroy any rule that slows down environmental degradation. The legislation is so loaded with industry-backed amendments and riders... that it reads like a polluters' letter to Santa Claus. One provision would allow uranium mining right next to the Grand Canyon. Another would stop EPA from regulating pesticides, even if the pesticides kill endangered plants, birds, fish and other animals. EPA's funding would be slashed by 34% over the next two years, but America's oil and gas companies would be given an extra $55m on top of the $36bn in federal subsidies they already get."

Trance I'm Listening To

2011-08-13T00:22:00.003-04:00

My previous post on the best trance songs has remained one of the most popular posts on the blog (it's one of the top three most visited). So I guess it's time I at least post a list of top trance songs I'm listening to right now. These aren't in any particular order (as per the other list). It's just quick list of songs I'm listening to (and yes, I'm aware that some of these don't necessarily qualify as trance... but remember, I don't care).

The quick list is below with embedded videos after the list. Enjoy.

1.) Above & Beyond - Hope
2.) Gareth Emery - Soul Symbol
3.) Orjan Nilsen - So Long Radio
4.) Slusnik Luna - Sun 2011 (Radio Version)
5.) Dinka - Road to Perdition
6.) DJ Shah & Laruso - Zanzibar

This is a fantastic song, and I think it could maybe make it my Top Ten Trance Songs of all-time, but its not one of the foundational trance tracks yet. However it's still fantastic (as are most of the tracks on Tri-State, I'd give the entire album a run-through if you like Hope, or if you're a casual trance fan who's never heard of Above & Beyond before). I think I could have included the title track, Tri-State, on this list but figured I wouldn't overly populate this list with songs from one DJ or group.

I'm not sure why I like this song so much, but its probably got something to do with the underlying baseline (an Emery specialty). The steady build-up is fantastic and Emery really layers in each new 'chorus'. After each bridge he adds something new and the piano work throughout is fantastic. For you non-trance (or non-electronic) fans, please remember tha the embedded version of this track is a DJ track which means it's got a lead-in beat so DJ's can synch to it when performing live. Click ahead 30 or 40 seconds or more to skip over the intro beat. And, on a sidenote, if you choose to download any trance tracks, a free music mixer like WavePad will let you edit your mp3s so you can take out the long intros and outros and even make the track fade in or out. For advanced music editing (like crossfading and adding effects, the software requires a $19 purchase... but if all you want to do is trim tracks and fade in or out, WavePad is pretty easy to use and it's free.

This is a pretty popular track in heavy rotation at most clubs right now and deservedly so. Time will tell if this holds up well for me, but for right now it's in my own personal 'heavy rotation' list.

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Slusnik Luna - Sun 2011 (Radio Edit) [HQ]

I could write almost the same thing about this track as I did for Nilsen's above. It's in heavy, heavy rotation for me right now and I can't tell if I'll get sick of it yet.

Road to Perdition is a lighter than most of the tracks I've already listed and I'm really starting to like Dinka's stuff, but a lot of her tracks do tend to sound very familiar. I really enjoyed Claes Rosen's remix of her song Cannonball from a few years back. Anyway, Road to Perdition is a solid, softer trance track that I've been listening to for a while now.

DJ Shah (who sometimes goes by the alias Sunlounger) and Larruso teamed up to create the album Global Experience. The album was good, but Zanzibar stands out as the best track. The underlying 'chorus' evokes a native African feel and rhythm, and for that reason it reminds me of the relaxing nights I've had on the more quiet, exotic beaches that aren't in touristy areas (basically, it's not an Acapulco club track, it's more like a relaxing, quiet night of wave watching in San Juan del Sur, Nicaragua... or, more obviously a track that's probably appropriate for the tranquil beaches of Zanzibar, but I've never been there so I wouldn't know).

Enjoy...

Mental Gymnastics & The Downgrade

2011-08-09T12:47:00.008-04:00

Karl Smith, blogging over at Modeled Behavior, put himself and his readers through some mental gymnastics yesterday as he tried to push back against Paul Krugman's (and others') statement that the market completely disregarded S&P's downgrade. Smith does his level best to make an argument that the ratings agency's actions weren't completely ignored. But, as I said, he goes through some mental gymnastics to do it.

The only real argument Smith could make that S&P's downgrade had an effect on the market in any tangible way is to first proclaim that what we're seeing is the the downgrade's baseline scenario. Yesterday was the baseline scenario for reaction to a downgrade. Therefore the ex-downgrade scenario is that in the absence of any downgrade, treasuries yields would have been pushed even lower.

If you want to claim that S&P's downgrade had any effect at all, that's the only argument you can make -- that US debt would have been even more purchased yesterday than it was.

You can't argue anything else. For the downgrade to really have an effect we would have seen a selloff in the stock market accompanied by a selloff of US treasuries (and a flight to substitute AAA-rated assets like other sovereigns, or perhaps even AAA-rated domestic corporates). But the treasury selloff never happened. So S&P was basically ignored.

Journamalism: Downgrade Commentariat Edition

2011-08-08T21:50:00.000-04:00

Just a quick review for everyone: Over the weekend, Standard & Poor's downgraded the debt rating of the federal government of the United States. Their downgrade signaled that S&P felt US government debt was no longer as safe an investment as it once was, and that a default is now more likely than it's ever been (not that S&P is saying the probability of default is large... perhaps they thinks it's only 1%, but, in their opinion, it has definitely risen).

Now then, if S&P were right, and the probably of a US default on its debt has increased, and if worldwide financial markets were attuned to S&P and believed in S&P's astute analysis, what would you expect? Investors would sell their US treasury holdings, right? And if investors sold their US treasury holdings, then the interest rates on US treasuries would rise. All of this is really obvious, right? I mean, this isn't that difficult to understand, is it?

But what happened in the financial markets today? Well, apparently investors were so terrified of US government debt (with its shiny, new increased probability of default) that they resorted to buying more US government debt than ever before. As a result, these terrified-of-US-debt investors pushed the government's 10-year bond rates down to 2.31% (from 2.47% where it closed on Friday before the downgrade).

So clearly, S&P's downgrade was not a factor in any investor decisions made today. Clearly, S&P's downgrade meant absolutely nothing to anybody. Clearly, this was a resounding statement by the market that S&P's downgrade was meaningless. Clearly, this was a statement by the market that it doesn't care anywhere near as much about the federal government's fiscal problems or its debt levels or rating as much as the commentariat has proclaimed. Clearly the market doesn't give a fig about the US getting its fiscal house in order in the short- or even medium-term. Clearly, the market is much more concerned about an economy still struggling to get off life support with no sign of government aid coming to fix the economy's fundamental weakness on the horizon.

But the markets tanked today and I don't think I saw a single journalist make an honest or correct statement about it. The only honest, and correct, statement on what happened in financial markets today is that the debt ceiling fiasco was exactly that... a Tea Party-manufactured fiasco -- and sideshow -- that didn't matter one fig to the markets or the economy, and the S&P's downgrade as a result, was as much a fiasco.

The only honest, and correct, statement to make about financial market selloff today was that markets tanked due to fears that the economy (which is shriveling from the drawdown of federal government support) and its prospects look increasingly weak. The only honest, and correct, statement is that financial markets tanked today because the economy needs stimulative government aid, not contractionary budget deals. The only honest, and correct, statement is that the President has sided with the Tea Partiers in believing that contractionary government measures will actually be expansionary and markets were rightly terrified, so they sold stocks and retreated into government bonds because the economy isn't likely to get help from the government in the form of another round of fiscal stimulus, QE III, better mortgage modification programs or debt relief programs. Therefore, the only honest, and correct, statement to make is that the debt ceiling and the government's fiscal problems were a pointless sideshow and a blockade that has succeeded in preventing the federal government from aiding the economy.

But that's not what anyone said today. Instead we got Journamalism -- and there were so many incidents to choose from, so here are just a few from some of the bigger names:

Bloomberg:
U.S. stocks tumbled... amid concern that a downgrade of the nation's credit rating by Standard & Poor's may worsen an economic slowdown.

Reuters:
President Barack Obama's first public comment about Standard & Poor's downgrade of U.S. debt... was not enough to stop a market plunge... with investors uncertain if Washington can overcome political gridlock.

The Guardian (this one is nonsensical beyond description):
Despite the Wall Street selloff, prompted by the ratings downgrade, investors piled into US treasury bonds.

Investor's Business Daily:
U.S. downgrade slams markets... stock markets were rocked Monday by Standard & Poor's downgrade of the U.S.

Wall Street Journal:
S&P's decision to downgrade US triggers corporate bond selloff.

Sprizouse's August Stock Promotion

2011-08-08T20:11:00.001-04:00

The stock market has been hammered over the past week, which usually means its a good time to buy stocks. And since I haven't promoted a stock since picking KapStone Paper and Packaging Corp. back in June, I thought it was time I publicly made another recommendation.

My pick for August is Intel Corp. I chose Intel solely because I was looking for dividend paying stocks that have high upsides. I tried to stay away from the more volatile tech stocks, but nevertheless Intel still made the cut and I'll get into their full report below, but first I want to review KapStone.

KapStone outperformed the market for most of July, but came crashing back to earth when the overall market crashed. It currently sits at $12.90 which is down $2.08 from the price at which I made my original KapStone stock pick ($14.98 on June 13). That's a loss of 13.9% since making the recommendation, and for comparison's sake, the S&P 500 is down 11.9% since June 13 and Alcoa Inc. (the stock I originally compared to Kapstone) is down 25.9%.

KapStone's performance obviously hasn't been great, and it hasn't even managed to stay ahead of the market's losses, but I didn't recommend the stock for short-term pops or for people looking for trade to make a quick buck. It was (and is) a long-term recommendation and I still stand by it in that respect (which is not much consolation for those of you holding the stock right now).

As for its quarterly report? Well, KapStone released second quarter earnings last week, and everything from the earnings report is basically in line with what I wrote in June. The firm is on pace for a 10-to-15% increase in revenue for 2011 and should beat their overall net income from last year rather easily. Their year-over-year net income doubled last year's June numbers, but that was to be expected as I noted before, from the price increases they instituted. KapStone hasn't taken on any other debt and they've managed to lower some of their operating costs even as they've increased in revenue. So, in short, nothing's changed with my KapStone recommendation from June. It's still a great stock and it's still a great stock to buy for any portfolio that wants to go long small-cap stocks or small-cap manufacturing or paper companies.

Now, before I get into the Intel recommendation, I'd like to make a brief aside to talk about the market in general. Yes, stock markets have plunged recently. But that usually means its a good time to buy stocks and sell bonds. And there also might not be any real economic, or fundamental, reason for equity markets to tank so horribly the way they have in the past week.

However, we are dealing with a very weak domestic economy, a very weak European economy (coupled with default fears in European periphery) and it appears the Fed and the federal government won't be doing much to intervene here (although its possible the Fed moves to institute QE III, as ineffective as that may be, it would still be something. And in Europe the ECB seems willing to step in and help in Italy, but all these are bandaid, reactionary-like measures rather than attempts to fundamentally stimulate demand). So we can probably expect equity markets to remain flat for the next year or two (at minimum) because demand isn't going to suddenly materialize out of nowhere, so there really is no end in sight to the recession no matter how rosy any macroeconomic forecast looks. Therefore, any large upswing (like the two-weeks-long rally in July) will probably be followed by a corrective downswing. And if you operate under the assumption that equity markets will remain flat for the foreseeable future then, as I mentioned before, it's reasonable to assume that now is a good time to buy.

Which brings me to my pick for August.

I was looking for any recommendations for sectors or for any particular stock that friends or family wanted me to analyze. I was asked for a recommendation to find a really good dividend paying stock. The question came from a conservative investor who prefers going long dividend-paying stocks and after nearly a week of research I came up with Intel.

I did everything I could to stay away from tech stocks because the tech sector is usually a more volatile sector as technology can, and does, change rapidly. But then again, as fast as technology changes, almost all tech companies will need processors of some sort to run their new consumer software or hardware -- think iPads, iPhones, super-thin laptops and what have you. At this point in the game Intel and AMD are the two main companies dominating this sector (yes Sun, IBM and NEC are in the mix, but for the most part, Intel and AMD lead the way). So if you're not afraid of tech stocks and you're looking for a dividend-paying stock, then look no further than Intel.

Intel currently just announced a new quarterly dividend for the third quarter (to be paid on September 1) of $0.21 per share (the stock just went ex-dividend on Friday, so if you buy now you're not going to get the dividend payment in September).

The dividend payment annualizes to $0.84 per share which (at Intel's closing share price today of $20.11) means they're currently paying a 4.18% annual dividend. For a tech company that's growing, and for a company that still has room to continue to grow because it's going to be providing microprocessors and chipsets to everybody's new iPhone, iPad and laptop for quite a while? Well, a 4.18% annual return on dividends alone, for that kind of a firm in that kind of industry, is really good.

So let's get into the fundamentals of why Intel's a good buy and see what we can see.

First of all, let me say that Intel isn't without issues. The company and the stock are not experiencing the same levels of production (percentage-wise) that a company like KapStone is. But that's to be expected when you're a much larger, dividend-paying company -- growth prospects tend to decline linearly with firm size.

Also, part of the reason that any company elects to start paying a dividend is that management doesn't see a need to retain a horde of extra cash to remain nimble and able to respond to any currently unperceived market threats. The company also doesn't see a comping period of high growth which means they won't need to reinvest excess cash back into the business and, say, build more manufacturing plants, spend more money on advertising or hire more workers. Therefore, growth rates and other growth measurements and components (like return on equity) tend to be lower with a dividend-paying stock than with a non-dividend paying stock.

So let me discuss the problems. First of all, Intel showed a spike in its overall level of leverage in last year's 10K. Specifically the leverage spike showed up in its accrued compensation, accounts payable and other accrued liabilities accounts. When most people look at a firm's leverage they tend to only look at levels of debt. But accounts payable and accrued compensation are really no different. They're just a different form of credit. The firm has basically received credit terms from a supplier (in accounts payable) or from employees (accrued compensation) and those accounts, just like any loan or credit taken from anywhere else) will eventually come due.

Last year, Intel showed a $1.2 billion spike in those three accounts. That's not a great sign for earnings going forward as it means the company could have under-reported its expenses by $1.2 billion last year. And even if there wasn't any conscious effort to under-report those numbers, that money will still come due this year or next and will have to be expensed away (therefore dropping 2011 or 2012's earnings by that amount).

But Intel is a big enough company to get away with moving $1.2 billion around using discretionary accounting measures. To most mere mortals $1.2 billion is a monster number in absolute terms, but Intel's assets are $63 billion, and yearly revenues were $43 billion last year. So moving around $1.2 billion won't affect balance sheet or income statement ratios as much as you'd expect. However, if this were occurring at a smaller, less-established company, it might have been enough to scare me away. But, as of last year, Intel was sitting on $17 billion in cash and another $5 billion in short-term investments (which it had remaining after it paid out $3 billion in dividends). So Intel still has $25 billion in excess cash sitting around and you'd expect that when the $1.2 billion in accrued expenses comes due, it won't hurt net income and won't force the company to lower its dividend payment either.

Speaking of the cash on hand: Intel's revenues and net income have improved dramatically over the last two years and should do very well in coming years which is the primary reason its got so much cash on hand. And all that cash will eventually have to go somewhere, so I'm assuming that their dividend payments will continue to rise next year (I actually calculated that the company would raise its quarterly dividend payment at some point this year while doing my analysis in July, before Intel made the actual announcement a few weeks ago).

The firm, in no small part due to its Sandy Bridge processors (which are being used in all those gadgets I previously mentioned), has also increased its profit margins to record levels. Their asset turnover ratio has remained steady (and strong) which means the company's overall return on equity for 2010 was its best in five years (2010 ROE was 23.1%, the last time it was that high was in 2005).

In all, the fact that Intel has been crushing the competition and generating record revenues in the teeth of the Great Recession bodes well for its medium-term future. And the fact that Intel's success over the past two years has allowed it to pile up a hoard of cash bodes well for investors and dividend investors.

Nothing in Intel's accounts jump out as scary negatives beyond what I've already mentioned. Their accounting looks legitimate across the board with low levels of accruals and solid earnings. The stock looks underpriced for one that pays a 4.2% annual dividend and the company has a solid buffer against any unforeseen economic events or problems with so much cash on hand. Therefore if no disastrous economic problems materialize in the near future (I can't make any promises we won't have a seriously bumpy ride in the near-term), then Intel should be able to sweep away that $1.2 billion without blinking and investors should expect them to continue paying out strong dividends and performing above most.

(Full disclosure: I hold no positions in any of the stocks I've mentioned in the post. Also... if you're taking stock advice from a random guy on the internet, its probably a good idea to reexamine your overall investment strategy).

Downgrade FAQ

2011-08-08T16:14:00.000-04:00

Felix Salmon has put up a response to my earlier post on S&P and the downgrade. He takes a lot questions and responds to them in a nice S&P Downgrade FAQ, if you will. I obviously don't agree with everything in it, but it's definitely worth reading, and I agree with most of it.

Picking Bones with Felix Salmon (and S&P)

2011-08-06T22:31:00.000-04:00

I have another bone to pick with Felix Salmon's post today on the downgrade. He (like Tyler Cowen) is of the position that those of us who criticize the messenger and point to S&P's failures are missing the broader point -- that the government's willingness (short-term) and ability (long-term) to pay back its debt should be rightly questioned.

Fair enough. I'll concede that point (sort of).

First of all, let's admit that the downgrade has come, in large part, because of the debt-ceiling nonsense. S&P has even said as much-- recent 'political brinksmanship' (their words) led to this downgrade. So S&P took the Republican threats to default very seriously.

And the GOP threat of default came about because Republicans couldn't wreck Medicare, Medicaid and Social Security through normal legislative processes so they held the country hostage until they got what they wanted -- and so what if the country could borrow billions of dollars for ten-years at less than 3.0%? Republicans were quite happy to wreck that kind of borrowing power in slavish worship of their decades-long ideological mandate to destroy Medicare, Medicaid and Social Security. All of which should give you a terrifying view of just how nuts the crazies running the Tea Party wing of the GOP really are.

Which brings me to my point. The current wingnut ideology running amok in the Republican Party is not news to most. Anybody could see the Tea Partiers were insane long before they won a bunch of elections during the 2010 midterms. Heck, the Bush years were filled with hogwash about destroying government surpluses 'for the people'. A lot of political strategists also knew that Obama should have tied the extension of the Bush Tax Cuts in December to a raise of the debt ceiling or else the GOP would hold the country hostage.

But S&P didn't downgrade the country's debt at any of those times. But why not? Why not downgrade after Bush and a GOP-held congress inflated the federal deficit to mammoth proportions eight years ago? Or why not downgrade right after the midterms? That would have been acceptable... it would have been like an 'independent' referendum on what happens when you let crazy people run your country. Or why not downgrade after Obama failed to realize Republicans would hold the country hostage back in December? Again, all of these would have been acceptable times to make the downgrade.

But now? After the debt limit has been raised (for nearly two years)? Well, I suppose its still acceptable to downgrade now, but I think it shows where the ideology of S&P lies, don't you?

Finally, bear in mind that S&P has no more knowledge about the country's debt than you or I. They know nothing that we don't know. The US government doesn't have opaque securities and derivative trading positions. It's the government. So S&P is passing judgement on what it believes is the US government's current, short-term willingness to pay its debts (they say we're probably not willing to pay). Fair enough. But why not come out and say, "As long as Tea Partiers and Wingnuts have a foothold and serious clout over the United States' political system, we cannot give rate the United States as a AAA country"???

I would have preferred that. It would have been the truth.

S&P Decides that Publicly Setting Fire to its Credibility is a Good Thing

2011-08-06T14:48:00.001-04:00

Not content with simply being a useless organization, S&P decided to draw attention to itself yesterday by lighting what remained of its credibility on fire. S&P downgraded the USofA's credit rating last night from AAA to AA+, and the move drew a lot of attention, natch.

Before I get into the stupidity of drawing attention to yourself when you've done nothing good in the last ten years, I'd like to note that S&P has been telling us the federal government's credit was AAA-rated for a long time. But now they're saying its not. However, this doesn't mean they were right in either respect. S&P has proven they're not qualified to pass judgement one way or the other. So all this downgrade will do is draw more (unwanted) attention to a pointless and broken system of which S&P is a part. And, what the heck, the morons even misplaced a paltry $2 trillion(!) in the process of making the downgrade.

So what's going to happen now? A lot of experts are contending the government's borrowing costs will rise because of the downgrade. The fearmongerers are warning us to expect a surge in bond rates, which will, in turn, produce a surge in mortgage rates, credit card rates, auto-loan rates and the like.

But the US economy is still in the grip of a painful recession and a liquidity trap. So the flight to safe assets will continue until the economy strengthens, and the market won't care one fig about S&P's new rating. Instead its much more likely that the market will go on assuming US government bonds are the safest of safe bets and the downgrade won't register as a blip on most radars. There's a precedent for this as well. Japan, which went through a similar recession (with accompanying liquidity trap) in the '90s and early '00s (and is really still going through it) had their credit downgraded by the ratings agencies. The downgrade came because Japan's federal debt as a percentage of GDP was rising (mostly because the Japanese government was trying to fight the recession and liquidity trap... just like we did with the stimulus in 2009 and with massive government spending in the New Deal and the run-up to WWII in 1930s and '40s.

So here is a chart of the historical bond rate in Japan. Can you spot the downgrade? It was in April of 2002 when the ratings agencies lowered Japans's credit rating from AA to AA- (which meant the world's second-largest economy had a credit rating on par with Malta and the Czech Republic). But look, just look, at what happened after the downgrade: the 10-year bond rate skyrocketed to nearly 0.9% (and by skyrocketed, I mean, fell). By the way, Japan's 2002 downgrade came on the heels of S&P maintaining an investment-grade rating on Enron right up until their collapse.

So now S&P is has proven once again that they're not only useless but this move will likely also prove that they're completely ineffectual as well. They are a pointless vestige of a broken system and not only that, but they have an ideological agenda and a harmful bias against public-sector debt.

Look, the US does have a long-term deficit and funding problem. Rising healthcare costs threaten to create an unsustainable budget deficit for the federal government (starting, perhaps, in 2020) but certainly not now.

The government is running a large deficit right now, but deficit spending in the teeth of the worst economic collapse since the Great Depression should be encouraged. The federal government should, and easily could, spend lots of money to push the economy out of this recession, then raise taxes and fund itself much more healthily once the economy is on track and booming again.

During the Great Depression, the levels of federal government spending as a percentage of GDP was much higher than it was at any time in the last three years (even with Obama's stimulus). And keep in mind that the government spending that pushed us out of WWII involved building tanks, planes and bombs which, after the war, had no economic usefulness whatsoever. As I've said before, the government could have built all those tanks, planes and bombs and pushed them into the ocean and it would have still pulled the country out of the Great Depression. This runup to the war, when the country was at full employment, but was building nothing of economic value, basically proved John Maynard Keynes' 'money-hole' assertion.

In Chapter 10 of General Theory, Keynes said the the government could bury bottles of money at the bottom of a coal mine, cover it up and have workers dig out the money. He argued that this wouldn't be the most effective form of stimulus but it would be better than nothing. Judging from the postwar boom of the 1950s and '60s when the country experienced two decades of GDP growth at annual rates 4.14% (the best two decades of economic growth in the country's history), I'd say his theory was proved correct.

But I digress. We don't have a short-term or medium-term deficit problem. But S&P was in a rush to prove that their pathological government-hatred runs as deep as the wingnuts' and Tea Partiers'. But the latter two groups have no credibility when it comes to understanding, well, anything. Is that who S&P really wanted to lump themselves in with? As I said, the sooner the ratings agencies are swept into the dustbin of history and replaced with a system that rates bonds and debt independently, the better.

More Ratings Agency Discrediting

2011-07-15T16:16:00.000-04:00

Felix Salmon has an interesting chart up today on the rise of AAA debt in the debt markets since 1990 (I've reproduced the chart below, via FT Alphaville). He and FT Alphaville are right to say that it's a scary chart but their conclusions at the end are very wrong.

This chart is at its most terrifying when looking at the runup to the financial crisis from 2002-2006. Securitized debt that was rated AAA exploded into the market and brought about terrifying consequences. However, when Felix looks at the fall of the overall level of AAA-rated debt and its subsequent rise to its highest levels ever (in 2009), and use that to make the assumption that there's now a coming crisis in AAA-rated sovereign debt is a bit far-fetched.

First of all, the rise in the AAA-rated sovereign is a textbook macroeconomic response to a liquidity trap. And most of the rise in AAA-rated sovereign debt is attributable to the United States' stimulus package. If the chart went far enough, I would imagine the bar would be even higher in 2010, though contracting in 2011 and falling to pre-crisis levels completely by 2012-13. So the explosion in sovereign debt is to be expected and it's not an economy-threatening, looming black cloud (And I'd like to make a side-note here to address some of Felix's commenters who think China's to blame for the rise in sovereign debt... there are only 20 countries with AAA ratings and China isn't one of them. Instead it's mostly the United States, Canada, Australia and western European debt we're talking about).

Now, perhaps the rise in sovereign AAA-rated debt would be of concern if those countries were issuing complex and opaque debt instruments or if their political ability to tax and control spending were questionable, but if that were the case, those countries wouldn't have AAA ratings. So we're talking about countries who certainly have the revenue-generating means to pay their debts as well as the ability to pay off debt in their own currencies (for the most part). It's really hard to imagine there's a bubble or a coming problem with the debt issued by these twenty countries (leaving aside the current conservative-fueled, debt-ceiling insanity in the US).

Furthermore, it's arguable that the one thing the ratings agencies rate the most stringently (though incorrectly) is public-sector debt. So it can be assumed that they've been much more stringent in rating the AAA sovereigns than, say, asset-backed securities. This goes without mentioning the fact that sovereign debt ratings reflect public information -- the ratings agencies have no more information about the United States and its ability to pay its debts than you or I. They are simply looking at the political landscape and measuring debt levels to GDP and seeing if there have been defaults in the past.

What critical information are they giving us on sovereign debt that we don't already know? None, basically.

The debts of AAA-rated sovereigns can't really be a coming crisis waiting to happen when textbook macro says current sovereign debt levels are not only necessary, but welcome. Furthermore when countries like the US have successfully run greater debt-to-GDP ratios and higher levels of deficit spending to get out of depressions in the past (without suffering a default or crisis), and when the public and investors have as much information about AAA-rated sovereign debt as the ratings agencies -- what exactly is the fear here?

What really stands out on this chart is not a coming crisis in sovereign debt levels, it's the explosion of AAA-rated securities issued between 1998 and 2008. The size of the AAA-rated securities in the market actually grew to be bigger than the AAA-rated corporate offerings or AAA-rated sovereign debt offerings. Which, logically, is impossible. How can there be more AAA-rated securities floating around, than AAA-rated entities to issue them? The answer to that--natch--is that there can't (although I'll admit that there might be say, a few hundred thousand extremely wealthy individuals who have AAA-rated debt on their mortgages or other loans that could add to this market... but they would have needed to contribute more than a trillion dollars to the overall debt market in 2006).

Anyway, as we all well know, investors were buying AAA-rated debt that wasn't actually AAA (heck, in some cases, the securities weren't even worth the paper they were printed on).

So this chart is really another indictment of the ratings agencies and their collapse into worthlessness, and Felix can be forgiven for not pointing that out (as he's been critical of the agencies before). However, he should revise his opinion of the AAA-sovereign 'problem' and focus more on the distressing fact that the size of the AAA-rated asset-backed securities market didn't shrink to almost nothing 2009. In fact, what that seems to signal that it is still business-as-usual on Wall Street, that nothing's changed, and that since no new measures or regulations have been put in place to fix the ratings system we're going to continue down this path until someone does change it.

After all, the market will always be hungry for AAA-rated debt, so Wall Street and the ratings agencies will dutifully continue to provide the world with the AAA-rated debt it so desperately wants.

Journamalism - CNN Edition

2011-07-05T22:12:00.001-04:00

CNN, in what I imagine was some lame attempt to court the wingnut demographic, allowed Rick Warren to publish a post on the CNN homepage that remained up there for most of this past weekend. The post's title and Warren's main point profess a belief that the church is the world's most powerful weapon in the fight against AIDS in both Africa and around the world.

Most people only need to read that far to know that the article probably doesn't pass the smell test. After all, when has the church ever done more harm than good in educating, informing and helping eradicate sexually transmitted diseases? Without even reading the article most people know the church is much more likely to make STD problems worse by preaching abstinence (which has been proven, over and over and over again not to work) and maintaining an intolerant, hostile attitude towards all other methods. I mean really, this is pretty common sense. And, like I said, anybody with half a brain would probably recognize that Warren's op/ed doesn't pass the smell test.

But the people at CNN don't have more than half a brain. So being the outstanding journalistic organization they are, they let Warren publish his op/ed on the front page. Little do they know (apparently) that far from doing anything in Africa to actually help the AIDS problem, Warren is actually making it worse by preaching -- you guessed it -- abstinence!!!

Also, he holds "condom burning" events.

Fantastic.

Here's Max Blumenthal doing the heavy lifting on this almost two years ago... nice to know that CNN can't even bother to do a Google search, and instead felt like setting fire to their journalism credentials.

Stimulus Errors

2011-07-04T14:45:00.002-04:00

I usually enjoy reading Karl Smith over at Modeled Behavior but I think he makes a mistake here:

I agree with Matt Yglesias so often that sometimes it seems pointless for me to bother blogging... Matt echoes Noah Smith and Paul Krugman’s criticism of John Taylor

Per Smith, “Lucas, Sargent, etc. thought that government purchases wouldn’t raise GDP” which is the reverse of Taylor’s conclusion. ARRA didn’t boost GDP because a temporary boost in government purchases won’t boost GDP, and ARRA didn’t boost GDP because it didn’t lead to an increase in government purchases are incompatible positions. They’re just both criticisms of ARRA and therefore perhaps emotionally satisfying to people who dislike Barack Obama.
I actually think Taylor is making an important substantive point here. It’s that in practice fiscal stimulus doesn’t raise GDP because in practice fiscal stimulus amounts to giving money to people, who then save it – just as Lucas, Sargent etc, said they would.

Moreover, if you are using “old” models with rational expectations or Ricardian equivalence this shouldn’t happen. Matt’s basic model that if you give people more money, they will do more stuff with it should hold.

Admittedly, this is my basic model as well and Taylor’s evidence cuts against it.
If you had already accepted that its simply not possible to ramp up direct federal expenditures in a timely manner then this is an important critique. In practice fiscal stimulus means giving somebody money: tax payers, COBRA recipients, the unemployed, state and local governments, etc.

If all of these folks are simply going to save the money then fiscal stimulus doesn’t work.

Here's my comment on Smith's post:

Lucas doesn't have a point at all... not in the classical sense or the modern sense. And what you're both assuming is a situation of full employment -- which is really the only time fiscal stimulus wouldn't raise GDP.

But fiscal stimulus can raise GDP in all models when we're not at full employment because, like unemployment transfer payments, fiscal stimulus tends to give money to people who can't readily save it. Fiscal stimulus takes some of the slack, underemployed, unemployed workers and puts them to work, thereby they're able to pay off debt and consume. That raises GDP. If you think it doesn't then you're assuming that fiscal stimulus and unemployment payments are going to independently wealthy people who will just save the money.

In reality, this is much more likely to happen with tax cuts and it's why the multiplier for the stimulative effects of tax cuts needs to be discounted heavily. A large portion of tax cuts will go to people who are already working, who will just 'save' their tax cuts.

Finally, even in the old models with Ricardian equivalence, a fiscal stimulus should have stimulative effects on GDP, because the perfectly rational consumer will know that the stimulus is a one-time thing, funded by longer-term government debt. So the consumer can raise his consumption by the difference between the two.

New Al-Qaeda Names

2011-06-25T11:36:00.000-04:00

Wired has an interesting page running today looking for new names for Al Qaeda. They're doing this because some of bin Laden's final writings display an obsession with how far Al Qaeda's brand had fallen.

... bin Laden thought he was worse off, irreparably tainting his terrorist organization by killing too many Muslims. He started brainstorming new names.

The problem is that bin Laden sucks as a brand manager. One of his new handles...? "Monotheism and Jihad Group." That was the original name of Abu Musab al-Zarqawi's bloodthirsty al-Qaida franchise in Iraq that killed so many Muslims that Ayman Zawahiri begged Zarqawi to stop. When Zarqawi didn't listen, he lost his Iraqi allies, got blown up by the United States, and his group snatched defeat from the jaws of victory...

...we think you can do better... give al-Qaeda a new name - something that says, "Now With 20 Percent Less Eschatological Violence."

Here are my favorites:
Angry Beards
International House of Terror
Terrorists Without Borders
Yes We Quaran
The Artist Formerly Known as Al Qaeda
72 Virgin Airways
Turbanators
Mohammad and the Funky Bunch
Honey, I Blew Up the Infidels

And the winner, and easily the most popular entry so far:
Westboro Baptist Church

Sprizouse's June Stock Promotion

2011-06-14T19:43:00.002-04:00

I'm not sure who's reading this blog regularly, but no matter who you are I'm sure you're not here for stock advice. But that's what you're going to get today... I'm wading into the world of stock promotion. I'm not working in the equity analysis industry right now but I'd still like to keep my skills in this area sharp. So you faithful readers might start seeing monthly stock recommendations here on this blog. Feel free to act (or not act) on them as you see fit... and if any of my faithful readers actually DO act on my advice, I would seriously question your sanity. After all, who am I? Just some dude on the internet talking about stocks. Is that whose advice you're going to take when investing your money? Really?

Well anyway, without further ado, here's my stock pick for June.

A friend of mine recently asked me for a stock recommendation in the basic materials (raw materials) sector. I did some searching for him and came up with one company that looks attractive. I didn't do any macroeconomic analysis as to why this stock (or the raw materials sector) is a solid buy, so you'll have to do that yourselves. But what I did find was a stock with some great fundamentals; a stock that appears poised for some solid growth -- KapStone Paper and Packaging Corp. (NYSE: KS).

I will get into the full analysis of the stock below, but I'll say up front that I think it's a very attractive stock at a very attractive price (currently trading at $15.05 as of this writing). Here are two disclaimers before I get into the full analysis of KapStone.

1.) I don't have the resources that paid analysts at other companies do. This means I don't have the ability to call up the company, announce I'm covering them and then fly down to their headquarters and manufacturing plants to be sure that they're actually a real, honest-to-goodness company making real honest-to-goodness products. KapStone, for all I know, could be a complete and total fraud. However, I do believe that if a company was a complete fraud, there would still be something odd or weird I would see in their completely fictional financial statements that I would see. Keep in mind I'm not talking about Enron or WorldCom type fraud--that type I could see. I'm talking about absolute fraud whereby the company has absolutely nothing going on and no headquarters, manufacturing plants or employees.

2.) I don't own any stock in KapStone whatsoever, so I'm not "talking my book" here. However, I made the recommendation to buy KapStone to my family and friends yesterday, before deciding to also post the recommendation here. As far as I know, only one person close to me chose to act on my recommendation and they bought 150 shares ($2,200).

Now that that's out of the way, let's get started with the analysis:

Firstly it's basically a paper company and lord knows there isn't a whole lot of room for exponential growth in the paper industry (especially with newspapers going out of business and people using more electronic forms of communication). But KapStone makes products like dogfood bags, grocery bags and retail shopping bags, and the product mix for their signature KraftPak line is very large. Their other two main product lines are Kraft Paper and Linerboard.

KAPSTONE'S MARKET

According to the American Paper and Forest Association (an independent outfit) the market for two of KapStone's main product lines (kraft paper and linerboard) are below:

US KRAFT PAPER MARKET SIZE:

2008 - 1.6 Tons

2009 - 1.3 Tons

2010 - 1.3 Tons

US LINERBOARD MARKET SIZE

2008 - 21 Tons

2009 - 20 Tons

2010 - 21 Tons

There is no defined or reported market size for the KraftPak line (but KraftPak does account for a large portion of KapStone's sales). As far as overall sales, KapStone has pulled back from the Kraft Paper market in the last few years and increased their presence in the linerboard market. Kraft Paper sales were 43% of total sales in 2008 and have fallen to 21% in 2010. The linerboard sales accounted for only 32% of total sales in 2008 and have jumped up to 51% today.

So clearly KapStone is focusing on the larger market -- which, from an investor standpoint, is a good thing. However, they don't provide any indication of the margins or profitability in these markets. Which is a bit bothersome to me, since we can't tell which product mix would be most profitable and whether or not they're focusing on the most profitable line, rather than simply focusing on the largest line. However, further clues in the financial statement reveal that KapStone sold off a part of their business in dunnage bags back in 2008-09 mostly because it was too low margin. This indicates that someone at the company understands margins and wouldn't be pushing the company to invest in growing their shares of the linerboard market if it were, ultimately, less profitable (again, there's no guarantee of this).

The percentage of sales of the KraftPak line has also been growing, and as a trademarked line I would hope it's go the best margin. The competition in the kraft paper line includes Georgia-Pacific, Longview Fibre and Delta Natura. In the linerboard market the competition is International Paper, Smurfit-Stone and Georgia-Pacific and in their signature KraftPak line the competition is Rock-Tenn, Carustar and Graphic Packaging. So we can see that their competition is of the 'little-known' variety in the KraftPak market.

KAPSTONE'S FUNDAMENTALS:

Now for the interesting stuff. KapStone was formed by a bunch of investors (former paper industry guys) who wanted to buy some paper manufacturing plants and launch a paper company. They started by purchasing two kraft paper lines from International Paper in 2007 and another one from MeadWestvaco in 2008. They received approximately 400 customers from those two purchases but have managed to internally develop another 100 customers in the last three years, which is impressive. Furthermore, they've paid off virtually all of the debt involved with the first purchase, a good chunk of the debt used for the second purchase and in 2010 they finished their last earn-out payment to International Paper for the original purchase.

So the company has shed debt and shed other liabilities that are like debt and their revenues have been growing steadily even in the teeth of a massive recession. They have a much higher return on equity than most of the companies in their industry. For you noobs, ROE is defined as net income divided by total equity... it's a quick and dirty method for determining earnings that are available for equity holders (stock holders) after all investments in the company, debt payments and other liabilities have been paid. For stock analysis, ROE can be broken down into a number of component parts that lets you see how a company is achieving their ROE.

One of the ways to break down ROE is to use the component parts of ROE that are Return on Assets (ROA) multiplied by Leverage (Total Assets divided by Total Equity). If a company is 'goosing' its ROE through leverage, this would be unsustainable and that fact would show up in these ratios.

KapStone is, matter-of-factly, not using debt or leverage to goose up their earnings. Their leverage ratio has fallen consistently over the last three years as their ROA has grown... which shows that the company's management is what is driving profitability through higher sales and through management of costs and by growing the business organically. There are also low levels of accruals in the statements (so they're not using accounting tricks to goose earnings). Let's take a look at their ratios.

ROE

2008 - 16.6%

2009 - 22.1%

2010 - 16.1%

ROA

2008 - 4.1%

2009 - 11.5%

2010 - 9.4%

Leverage Ratio

2008 - 4.0

2009 - 1.9

2010 - 1.7

So, you can see that ROE has been steady while leverage has been falling (I'll get into the 2009 bumps in ROE and ROA in a little bit), but first I want to further break down ROA to see how the company's achieving that.

ROA can be broken into two components - Asset Turnover and Net Profit Margin. Asset turnover is a measure of how much revenue the assets of the company generate and Net Profit Margin is a measure of how much a company makes from its revenue after all expenses and taxes and interest payments have been made.

Asset Turnover

2008 - 1.10

2009 - 0.91

2010 - 1.13

Net Profit Margin

2008 - 3.7%

2009 - 11.5%

2010 - 9.3%

KapStone has solid numbers in both Asset Turnover and Net Profit Margin but the uneven growth in both sections requires further inspection.

What happened in 2009 was that the company liquidated their dunnage bag line (the line that I said was low margin) and a lot of the bump in profits comes just from that sale. Once that sale is removed the profit margin and asset turnover ratio both fall back into line with the steady growth the company's been showing. The fall in the profit margin in 2010 is due to the company losing an alternative energy tax credit in the fuel mixture it uses to create its products. That tax credit expired but there is potentially another one on the horizon for them. But I didn't want to forecast that the company would receive that credit in the future.

Looking through the financials, I also found that the company raised prices for 2010 and that contributed a lot to the bottom line. The price hike increased revenues by $60 million in 2010, which is no small number. And that's an unsustainable number -- because a company can't continue to raise prices on customers that much every year unless they're Comcast. So I have to project that the revenues will grow more slowly than they did between 2009-2010. But there is still good underlying growth with the stock and the lower potential growth in 2011 prices will be partially offset by the $50 million payment that KapStone made in 2010 to liberate itself from the last of the earn-out payments it made to IP. Basically, there won't be any more of those in the future.

I'm sure I'm not writing this as well as I should be and it might be confusing, but that's the bulk of my analysis and I'll do my best to summarize it all:

KapStone used debt and equity financing in 2007 to purchase some paper mills. They bought another one in 2008. These paper mills -- KapStone's core business -- have been successful enough that the company has managed to liberate itself from any large debts and to pay back all the earn out payments it still owed for the original purchases. The company is growing organically (and growing rather rapidly for a paper industry company) and it's got very strong revenue growth, healthy profit margins and cash flows and there aren't any red flags that come up in the financial statements (their pension plan is close to being completely funded as well). The stock is, by my analysis, undervalued and should appreciate a lot in the medium term (the next year or two).

That being said, what are the major concerns with investing in KapStone? There are obviously macroeconomic factors to take into consideration, but like I said, I haven't performed a macro-demand analysis. The paper market might implode tomorrow or their might be a substitute on the horizon that I haven't seen.

The other concern is that the company doesn't release numbers in their financial statements that show profit margins by product line, so we're left to assume that management knows what they're doing and is reinvesting the excess cash flows into the higher margin business lines.

The final concern, and in my opinion biggest risk, is the overall health of the US economy. Any large drop in equities in the US will be experienced by KapStone as well (though one hopes, to not such a large degree). I can't see the US economy turning a major corner and growing substantially again until perhaps the end of 2012 or early 2013. Therefore equities should remain somewhat flat through the next year at least. With that being said, I certainly expect KapStone to outperform the market over that time frame.

The final concern for any of my readers who choose to invest in the stock is that I might not post follow-ups here on the stock (I might not monitor to ensure that the company is still healthy and on track). So, in that respect, buyer beware.

But I would highly recommend KapStone to any of my readers who happen to be active stock speculators.

Adventures in Journamalism (Philly Enquirer Edition)

2011-06-14T18:26:00.000-04:00

Erin Arvedlund over at the Philadelphia Enquirer writes up a horrifically-timed article about inflation and the problems it's supposedly causing. She seems to think that inflation is a massive problem as she's been listening to Philadelphia Fed Chair Charles Plosser (a noted inflation hawk who thinks monetary policy should have been tightened yesterday).

Neither Arvedlund nor Plosser bother to note anywhere in the article that unemployment is kissing 10% or that unemployment has been at extremely elevated levels for almost three years! I guess neither of them think that's a big deal for the economy. Or, I guess they think inflation is a far bigger issue. But is it really?

Fighting against runaway inflation might be--if not an acceptable stance--at least a reasonable statement that requires a reasoned response if, in fact, inflation were a real problem. But in Plosser's and Arvedlund's cases they're both trying to lie about inflation by using everything but core inflation to make their points. But as has been pointed out many times, by many many many economists (Nobel Prize winners even), there is a reason the Fed doesn't use volatile food and energy costs when making monetary policy decisions. They use core inflation and try to eliminate volatile prices because well, volatile prices are volatile!

What's particularly tone-deaf about Arvedlund's article this month is that energy prices and commodity prices have actually fallen recently. So would Arvedlund and Plosser--who both would have raised interest rates earlier this year--be equally as adamant about lowering rates now that commodity prices are coming in lower than expected?

My guess is no. Absolutely not. Because they're a couple of out-of-touch assholes with no real understanding of macroeconomics, yet both of them have somehow managed to rise to positions of power--Plosser as a person who can affect Fed policy directly, and Arvedlund as a respected journalist shoveling nonsensical crap to the masses through a respected news organization.

Awesome.

Adventures in Journamalism (Daily Mail Vol. 2)

2011-04-18T20:16:00.001-04:00

I'm not sure how the Daily Mail keeps getting away with writing such dreck, but today's edition tells us that the U.S. is in huge trouble and must get it's fiscal house in order immediately. Well, some of this is true. In the long run the government needs to raise taxes (on the wealthy would be a good start) to pay for Medicare's costs and needs to figure out how to get Medicare's costs under control. But that's the long-run outlook and has absolutely nothing to do with solving any short term fiscal problems. The United States can continue to run deficits now while in a recession to help itself out of a recession, and the current budget deadlock between House Republicans and President Obama over the 2011-12 budget will do nothing to fix any long-run fiscal deficits. Only allowing the Bush tax cuts to expire and passing further legislation to strengthen the Affordable Care Act will do that.

But the article says that the deadlock is what's causing problems. It also tells us that, because of those problems, the S&P might downgrade the US's debt rating but it doesn't ask why the S&P would even consider this... or even why the S&P is relevant as a ratings agency after their complete and utter failure to properly rate anything during the subprime debacle.

In short, the S&P hasn't downgraded the US's debt and they aren't likely to do it because the US government currently can't default. It's impossible. The US government owns no debt denominated in other currencies; all of its bonds are issued in dollars, of which an infinite supply can be printed, if needed. So there is absolutely no risk of the federal government defaulting on any of its bonds (which would be the primary reason for a downgrade). The only risk to investors is that the US government actually has to print a bunch of dollars to pay off all of its debts and by doing so cause runaway inflation.

But without even looking at the economics of the issue, there still exists proof that you should never read the Daily Mail for economic or financial news again; because they're liars and deceivers.

If the S&P was going to downgrade the US government's credit rating, what would be the first thing we'd expect to see? A rise in interest rates on the US government debt right? Why? Because when a company (or in this case, a country) has it's credit rating downgraded, people stop buying that company's (or country's) bonds and therefore those interest rates rise. But what happened today? Absolutely nothing. In fact, interest rates on US bonds fell today as more investors bought the federal government's debt. Clearly investors aren't the least bit worried about the US government's ability to pay its debts. But if you read the article, it doesn't mention the rates on US government bonds at all. Not once. Anywhere in the article. Instead, it talks about the stock markets around the world all dropping, all of which have nothing -- absolutely nothing -- to do with the US government's credit rating.

Here's a direct quote from the article which aims to deceive:

Elsewhere, the Dow Jones plunged 183.68 points (1.49 per cent) to 12,158.15 in the first three minutes of trading as the ratings agency raised the alarm bell giving a strong vote of no confidence in America’s ability to tackle its deficit.

I don't know how a financial reporter could write that sentence with a straight face. Because what the reporter actually should have said was, "Elsewhere the Dow Jones plunged as investors fled stocks and plunged more of their money into US government bonds despite the S&P's idiotic statement that they might downgrade the United States' credit rating. Clearly investors are giving America a strong vote of confidence in its ability to tackle its deficit."

Journamalism (Daily Mail edition)

2011-03-23T18:03:00.000-04:00

I was forwarded this article from the UK's Daily Mail from a friend and thought I'd comment on it as it seems another case of journamalism run amok. In this case, however that could be due to one of two possibilities: either the journamalist doesn't understand what he is writing about or he's pushing a right-wing agenda... which, given that the Daily Mail usually supports the Conservative Party, is a distinct possibility. On to the evidence...

The headline claims that the cost of living in the United States is now at an all-time high (notice they don't say the Cost of Living Index, which is the same as the CPI). That in and of itself is deceiving as the cost of living is almost always going to be at an all-time high sans a deflationary economy (but I'll get to this later).

The first evidence provided by the Mail of an increased cost of living is the statistics from the Chained Consumer Price Index. The Chained CPI (or C-CPI-U) doesn't factor out food and energy prices, which is the main reason economists don't often use the C-CPI-U as a reliable measure of inflation.

Food and energy prices are very volatile in the short-term so they have to be factored out. A late frost in Florida will cause a huge spike in orange juice prices, but should that spike in orange juice prices be considered when the Fed is trying to measure inflation? If so, they would be trying to tame inflation at a time when inflation isn't a problem. And as for gas and other energy and commodity prices? Well gas prices, in particular, have become unhinged from the economy as a whole (thanks to Goldman Sachs) and all commodity prices are now more subject to the swings of speculators and the total amount of money in wealth funds the world over, and the growing use of commodities in the large emerging markets. Anyway, for all those reasons, commodity prices shouldn't be used to decide whether or not inflation is present in an economy.

Now, admittedly, commodity prices do play a part in inflation but they're not nearly as large as you'd think (even if it seems like an item would have a large commodity component to it). Here's an example via Paul Krugman:

In December, says the Bureau of Labor Statistics, a one-pound loaf cost an average of $1.386. How much of that was the cost of wheat? As best I can tell, a bushel of wheat produces about 63 pounds of bread; wheat has lately been selling at around $10 a bushel; so we're talking maybe 16 cents of that loaf of bread, or less than 12 percent of the price, reflecting the cost of wheat.

What I get from this is that wholesale food prices have a surprisingly small impact on the price of food, let alone on overall consumer prices. Again, not zero. But it's not at all peculiar to see large commodity price rises while overall inflation stays low.

Anyway, long story short, economists prefer the Core CPI (which factors out food and energy prices). And if the Core CPI is used then what we see is that inflation rates are at their lowest levels (roughly 0.5% year-over-year) since the CPI was first adopted and measured by the BLS in 1957.

Now then, let me address the other major fallacies (or deceptions) from the article. The article says that the cost of living is now at an all-time high. As mentioned before, my answer to that would be, "Well, duh!"

The U.S. economy hasn't actually experienced across-the-board deflation in any products except in house and car prices in certain pockets of the country. Deflation is a very dangerous and almost incurable economic problem, but just because we're veering dangerously close to it and economists are warning us about it, doesn't mean we've actually experienced it. Core inflation is running at an all time low (roughly 0.5% per year) but that still means things are getting more expensive on a 0.5% year-over-year basis. So of course the cost of living is higher today than it was yesterday, higher than the day before yesterday, higher than last week, last month and last year. The disingenuous Daily Mail article fails to mention this.

As if to further prove they're being disingenuous about inflation they include a chart from the BLS that is almost completely meaningless. The chart shows the relative price level of the Chained CPI and shows that it's going up and up and up. But that chart does not show inflation "rates", it only shows what an assembled basket of goods (priced at $100 in 1978) would cost today ($220). So again, without actual deflation, this chart is only going to show rising prices.

In short, the Daily Mail's article and the journamalist who wrote it are probably no different from all the other conservative hacks out there calling on the U.S. government to rein in spending and halt all efforts to get the economy back on track.

Fox "News" at it again

2011-03-02T12:49:00.000-05:00

The clip below shows a lack of snow on the ground and that Wisconsin recently imported palm trees.

From Digby (via Krugman)

Economic Terrorism?

2011-03-01T19:48:00.000-05:00

I'm at a loss in trying to understand how people like Kevin Freeman have real, economic / financial jobs and appear to have no understanding of basic economics or finance.

In a report to the Pentagon, Freeman states that the Chinese are the likely culprits in a financial terrorist attack against the US (and, along with jihadists, could be the ones to blame for the 2008 financial crisis which was clearly not the result of banksters siphoning money out of the US financial system directly into their own pockets).

I have to wonder how it's possible that he doesn't understand that China's own economic self-interest is tied to America's economic success? In short, what advantage do they (or did they) gain by destroying the US economy? It's the underpants gnome theory of financial terrorism:

1.) China destroys US financial system
2.) ???
3.) Profit!

Secondly, Freeman claims that phase three of this diabolical terrorist plot will involve countries dumping US bonds to devalue the dollar which will further accelerate our decline. But, um... why would China want to do this? China owns nearly two trillion dollars worth of US government bonds (basically they hold two trillion dollars worth of US dollars). So if they start dumping their dollar holdings then the dollar holdings they currently have will further be devalued and they'll end up completely ruining their own balance sheet.

Now then, I can see how Freeman might believe a domino effect is possible because if China started dumping their dollar holdings every other government that's currently holding dollars would do the same because none of them would want to get stuck holding a ton of worthless dollars (this is the same mechanism behind panic selling in financial and stock markets). However, even that isn't a threat to the United States as a devalued dollar at this point might help US exports regain competitiveness.

But if this prophecy does come to fruition and the dollar does crash and inflation becomes a severe problem then we can deal with that. Raising interest rates and tightening the money supply are very effective tools for fighting inflation which Paul Volcker proved in the early '80s. Inflation is a much less severe problem and one much easier to fight than deflation, no matter how much conservatives and conspiracy theorist nuts with real jobs that have influence over government policy (like Kevin Freeman) insist that inflation is the greatest threat to mankind.

The Furniture of 2015

2010-06-03T22:27:00.000-04:00

George: The Drama

2010-04-30T13:25:00.000-04:00

Size Does Matter!

2010-04-19T01:34:00.000-04:00

I love Paul Krugman. He outlines ideas and thoughts in easy-to-understand posts and op/eds and I've come to believe in the things he says easily and readily. He's nearly always right (as Brad DeLong says, "Rule #1 Paul Krugman is always right. Rule #2 - If you think Paul Krugman is wrong, see Rule #1). However, with all that said, I have a huge problem with his current tack on Financial Regulation and I definitely think he's wrong on his thinking about size.

Krugman believes that Too Big to Fail is not the most pressing regulatory issue, in the strictly asset-size sense. He thinks a cap on the absolute size of banks isn't necessary nor is it a key to successful Financial Regulation moving forward. In saying this, he's disagreeing with Paul Volcker and Simon Johnson, both incredibly intelligent economists in their own right. So I have a bit more comfort disagreeing with him because I believe size caps are a key to successful FinReg. In fact, size caps are just as important as limiting the predatory actions of the shadow banking sector, reducing opacity in financial products and so on.

The main reason Krugman isn't a big proponent of limiting banks' absolute size is because he doesn't view size as a major cause of the '08 crisis. He does admit that huge banks have stronger lobbying arms and are more dangerous in this way because they get to influence (or even write) legislation, but he also points out that the failure of hundreds of small banks can be just as damaging to the economy as the failure of a large bank.

Well, my response to that is, "What will happen if a bank that controls assets equal to 60% (or more) of GDP fails?"

After all, even if this hypothetical behemoth is the most regulated bank in history, subject to strict leverage limits, tougher legislation and daily government inspection, that doesn't guarantee it won't fail. We had strong legislation and regulations in place from the New Deal until 1980, and while the New Deal limited bank failures to just a handful between 1936 and the '80s it didn't eliminate them completely. There were still a handful. But FinReg also shouldn't completely eliminate bank failures anyway -- that wouldn't be a free or competitive market and it would create an implicit moral hazard in bankers as well.

So, does Krugman think the current legislation would achieve the complete elimination of bank failures and, does he think that's what we should be aiming for? Or does he not think that a bank so big it's larger than our current GDP won't be a problem if (or when) it fails?

My guess is he doesn't believe any of those. I think he's fallen into the trap of looking backwards at the '08 crisis and trying to fix the causes of that particular mess but only that particular mess (perfectly forgivable as he's been so close to the collapse; writing about it and talking about it since it happened). But what Krugman's failing to see is that proper legislation should not just be backward-looking, but forward-looking as well. As it currently stands congress has a chance to lay down rules and regulations 'post-crisis' that fix what caused this 'forseeable' panic. But they also have a chance to lay down rules and regulations that provide buffers for non-forseeable, future financial crises as well.

There are unknown unknowns out there (Taleb's Black Swans if you will) and there will always be unknown unknowns out there, so if we allow a bank to grow to such a size that the government can't perform an FDIC-style takeover because the bank is larger than the government itself (a la UBS in Switzerland), then we're just opening ourselves up to Black Swans.

I think someone needs remind Krugman of this.

Wall Street's Party

2010-04-19T01:05:00.000-04:00

Well, you can scratch what I wrote in the last post. Turns out the Republicans are definitely going to carry Wall Street's water. I think what's most amazing to me about this is the type of mental (and moral) gymnastics Mitch McConnell, and his fellow 40 Senators, have to go through to actually pursue this strategy.

First of all they know America and Main Street are against the bailouts and angry at the banks. So the only way McConnell can defend Wall Street (and protect his hedge fund pals) is to paint FinReg as some sort of favor to the banks. In fact, he called it a 'permanent bailout' (and Matthew Yglesias notes that John Boehner joined the nonsense later as well).

Similarly, the banks are also going through some shameless moral gymnastics of their own. They know they're Public Enemy #1, but by enlisting McConnell's help it's obvious they don't care. They're happy to let McConnell disparage them to the taxpayers as long as they can keep fleecing the taxpayers.

I'm not sure if McConnell thinks the rest of the country is dumb enough to swallow this, but all-or-nothing strategies (see: Republicans, blockade of health care reform 2010) is the only way the GOP is playing these days. I guess we'll see how this strategy turns out for them in November.

Adventures in Journamalism

2010-04-15T23:38:00.000-04:00

Graydon Carter, editor of Vanity Fair and self-professed libertarian, opens the May issue of VF with an essay that's critical of President Obama. His essay is just wrong in so many ways.

VF is a fantastic magazine and I love most of the work they do, but Carter's opening op/ed is terrible and misinformed.

He writes:

... the sense of disappointment among [Obama's] Democratic supporters is growing. Many feel that he took a wrong turn right from the beginning on the domestic front, i.e., that rather than work on the economy, jobs, and bringing the nation's rogue banking system to heel, Obama stuck his hand in the same woodchipper (universal health care) that Clinton did during his first term, and expected a different result. In trying to bring affordable health care to all Americans, Obama was going for the history books more than for the 24-hour news cycle. And there was something admirable in that. But here's the thing about America and universal health care: unlike in other Western democracies, not all of its citizens want it.

My guess is that the president is a slider-that is, someone who slides through life. When you're that good, that handsome, that educated, the world in your adulthood is your oyster ... My guess is that he's like a clever student who writes well and figures he can bull his way through an assignment for which he hasn't really done the dogged groundwork ... The administration overreached and underprepared.

Now, granted, Carter obviously wrote this editorial before the historic health-reform bill passed, but that's not the major mistake in his editorial.

He's clearly asserting that Obama should have 'focused' on the economy, jobs and bringing the financial system to heel rather than dither about on health care reform. My answer to Carter on the first two issues would be: Did you forget the $700 Billion stimulus package Obama passed three months into his term? WTF?

I'm not sure how Carter can overlook the stimulus, unless of course, he's doing it willfully. But if not, what did he think the stimulus program was for? Fixing health care?

Fiscal stimulus is a rare program and one that's heavy on spending is even more rare. But it passed and it has, so far, done what it can to turn around the economy. I daresay Obama, and his administration, were focused on little else but the economy and jobs during their first four months in office.

The fact that the stimulus wasn't big enough, that Obama's economists underestimated the depth and breadth of the recession or that Obama himself watered down the bill in a pointless attempt to get Republican votes (none voted for it anyway) are all legitimate gripes. But complaining that Obama focused too much on health care rather than the economy is hogwash. Absolute hogwash.

As for the second issue? Well, it's true that Obama may have put financial regulation on the back burner to focus on health care. It's also true that there was growing sentiment that a chance at 'real' reform was slipping away the further the economy moved from the financial crisis -- that banking regulations were losing 'centrality' in voter minds. But even that might not be the case anymore. Senate Republican leader Mitch McConnell took to the Senate floor this week and, in an unashamedly pro-banking move, proclaimed that any legislation directed at regulating the banks should be voted down. McConnell was lambasted by his hometown newspaper for his shameless antics, and couldn't rally his fellow GOPers to oppose FinReg.

So it seems, quite rightly, that the Republicans realize how suicidal it would be for them to carry Wall Street's water the way they normally do. Which means there's more than just hope for meaningful financial reform, there's actually a pretty good chance meaningful financial reform will pass.

So can we expect a mea culpa from Carter in the June issue of Vanity Fair? Will he apologize and say, "During Obama's first year in office he managed to pass an economic recovery package that, although too small, still kept unemployment below 11- or 12%. He also pushed through a historic health care reform bill, and now stands on the verge of meaningful financial reform."?

I'm not holding my breath.

Depression, Double-Dip Recession or Lost Decade?

2010-04-10T18:28:00.000-04:00

Over at Naked Capitalism last week, there was a guest post by Gonzalo Lira, a Chilean novelist, comparing the "extend-and-pretend" situation we're currently facing with the big banks to the "extend-and-pretend" plan Paul Volcker instituted in 1982 during the Latin American debt crisis.

Lira makes the point that the banks' balance sheets are in horrible shape, which they are, but at the same time, I think he's overstating the size of the holes. Lira's post is decidedly gloomy, and it doesn't seem to square with all the positive news coming out about the economy last week. So I decided to take a look at Lira's claims.

After my examination, I think I decided that his doomsday claims have some merit, but not overwhelmingly so. However, I also think the recent spate of positive news should be tempered.

To begin with I looked at Lira's claim that the suspension of mark-to-market accounting standards has made the bank balance sheets completely fictional. With the news about the repurchase agreements Lehman, BofA and, more likely than not, the rest of the bulge brackets were using, it's quite possible their financial reporting is completely fictional.

But I proceeded with my analysis as if there was some semblance of truth to them (and I figured WellsFargo was the best barometer for that, as they're less like the bulge brackets than the other major banks).

How did I start? Well I went back to the stress tests and Mike Konczal's post where he pointed out that the four biggest banks (Citi, JPMorgan, BofA and Wells Fargo) had a combined $477 billion in subordinated loans (2nd Liens) on their books. The government stress tests estimated losses on those loans to be in the 13-15% range, but Konczal pointed out that they were essentially worthless because they're nearly all underwater. And recent revisions to the stress-test estimates are now raising those estimates significantly.

For the sake of this argument, I assumed there was at least some salvage value in those loans -- and if home prices rise a little in the recovery, perhaps some can be salvaged. So I went with Konczal's worst-case scenario that puts losses on those loans at 60%. That means the big four have to write down $286 billion on those loans.

Well, contrary to Lira's claim, the banks actually have started writing off and writing down those loans. In fact between the stress tests and their 2009 10K filings (9 months), they wrote off a combined $43 billion (Citi, BofA and Wells Fargo all wrote off about $8 billion and JPMorgan wrote off $17 billion). Again, this all assumes that those loans weren't simply shifted off balance sheet. And, in fact, some of the expensing on the banks' income statements reflects provisions for bad mortgage debt, so it would appear they're trying.

What's troubling, however, is that even if they're being completely truthful, at their current prorated pace of write-downs ($64 billion annually) it will still take them more than 3-years to shed it all (and that's if the losses on those 2nd Liens are, at max, only 60% and that they'll be able to maintain their current rates of profit-making).

Which brings me back Lira's post. He mentioned that extend-and-pretend will only last as long as the banks can earn profits in the environment that has been artificially created by the Fed (this environment was best documented by Tyler Cowen). It's a statement with which I agree, because I don't believe the "artificial" environment will last for another 3-years. So it looks like the banks are, and will be, back in trouble at some point in the future, but I'm not sure that validates the belief in another, imminent crash either.

Lira predicts a coming Great Depression but I don't believe the situation is that dire. Are we looking at a "double-dip" recession? Quite possibly. But it's also possible we're looking at a Japan-style "lost decade" where the banks need ten years or more to write-off the bad debt on their books (this coming on top of the 2000s which were already a lost decade shouldn't make anyone happy, however).

There is stability in the overnight markets, the banks have avoided a crash, and they are (slowly) earning their way out of the hole. What it all means is that a crash likely won't happen again, but we'll probably see a lot of the same as what we saw through most of 2009 and the first quarter of 2010 -- businesses not being able to get credit, slow-to-meager GDP growth and high unemployment.

This is because the banks' most likely route to profitability -- which also seems to be their current core competency -- is through trading operations, not through long-term, small-business loans (when Yves Smith waded into the comments of Lira's post, she pointed this out by saying, "The equity markets are heavily manipulated right now -- I hear this from virtually every institutional investor I know, including ones at the top of large and respected firms.")

Well of course the equity markets are flooded with cash. The debt markets are flooded as well. The major banks don't appear to know any other way to earn short-term profits large enough to cover the holes in their balance sheets. Which is why we're likely facing a lost decade. The banks won't begin to properly loan to a credit-starved economy until they fix their own internal finances -- which could be at least three years away.

Cut the National Endowment for the Arts!

2010-04-09T01:04:00.006-04:00

I don't surf into RedState.com that often, but it's a useful tool for checking out the pulse (if you can call it that) of the "intellectual" side of conservatism every once in a while.

Went there today and the first post on the page was a post about a Value-Added Tax. I won't get into the pros and cons of VATs since I haven't studied them enough to form a valid opinion... yet. But that's not the most illuminating part of the post.

Here's what is:

Bernanke argues that Americans need to choose between higher taxes or massive cuts in critical government programs. He mentioned Social Security, Medicare, Education and Defense as areas of government spending that would be targeted if we don’t raise taxes. This is a false choice. The federal government needs to reform entitlement programs, needs to root out waste fraud and abuse and should eliminate programs like the National Endowment for the Arts.

Brian Darling is basically reiterating exactly what Bernanke said... almost to the letter! He says that what needs to be cut is 'entitlement spending' which is exactly what Social Security, Medicare, Medicaid and the ACA (once it goes into effect) are.

These are popular programs. They're not likely to get cut anytime soon. In fact, it's unlikely they'll ever be cut. Which brings us to the crux of the Republican party's current problems with economics... they want to cut taxes but when they get into office they realize they can't cut government spending because nobody wants to cut the "entitlement" programs that make up the largest bulk of government spending.

However, not satisfied with completely disagreeing with Bernanke by totally agreeing with Bernanke, Darling then advocates cutting the National Endowment for the Arts, a program that receives nothing but scorn from the right. But our dear Darling fails to mention that the NEA's budget for 2010 is $161 million, while the Federal Budget is more than $3.6 trillion.

Let's put that into perspective: The NEA constitutes 0.00042% of the federal budget.

Let's further put that into perspective: Cutting the NEA would save the taxpayer approximately 74 cents in annual taxes.

But let's be completely fair to Darling, who no doubt sympathizes with the richest Americans -- those poor souls who are most frequently raped by the government. Let's be fair to him by hypothesizing that the NEA's entire annual budget is taken directly from the most blighted of US citizens -- those unfortunate enough to be cursed CURSED! with the burden of being wealthy in the United States.

If we imagine that every household in the country earning more than $100,000 per year (approximately 17-million households) bear the direct burden of funding the NEA every year, then we could save those poor, wealthy bastards nearly $9.42 per year by cutting it!

$9.42 is nearly two Venti Starbucks Lattes! Think of the children! Oh won't you please think of the children!

Alright, I'm rambling... but we really shouldn't overlook how neatly Darling summarizes the conservatives' stance on social issues, their economic ignorance and what has to be viewed as the complete intellectual collapse of the modern Republican party all in one paragraph.

To recap this amazing accomplishment:

Ben Bernanke said, "Americans need to choose between higher taxes or massive cuts in Social Security, Education, Medicare and Defense."

Darling replies, "No, Bernanke is wrong! Americans need to choose between higher taxes or massive cuts in Social Security and Medicare. Oh, and also... the NEA needs to go."

Greenspan vs. Burry

2010-04-05T16:46:00.004-04:00

Michael Burry (of Big Short and Scion Capital fame) wrote an op/ed in the NY Times that was highly critical of Alan Greenspan. In it Burry wonders how, and why, Greenspan couldn't see the housing bubble coming -- which are fair questions. And it would be fine if Greenspan let it die there, since his reputation is already in tatters, but the former Fed Chairman digs himself in deeper (video below).

By claiming Burry's a statistical anomaly and saying Burry (and others) got lucky, Greenspan's defending himself like a six-year-old; a six-year-old who doesn't realize that the fact that he was wrong is not as important as recognizing his wrong-ness so it can be addressed -- something that ensures future mistakes don't happen again.

I think it might help if someone reminded Greenspan that Irving Fisher salvaged his reputation after he was colossally wrong about the 1929 crash. And in the process of recognizing and addressing his mistake he helped shape future policy.

Treasury Profits

2010-04-03T13:03:00.003-04:00

Felix Salmon is a financial / econoblogger over at Reuters and I must admit that I usually agree with most of what he writes. However, he's got an anti-nationalization position that he's still holding on to (and defending), even though evidence has moved against him.

He gave an interview to BNN recently and in it, he said the current profit of the Treasury's investment (bailout) in Citi is vindication of the anti-nationalization screed he wrote in October of last year. In his October post he said the government stress-tests proved the banks didn't need to be nationalized, which was a major weight-bearing leg of his anti-nationalization platform. However, that leg's been chopped off and can no longer be used to defend any anti-nationalization stance he takes (and I think he knows this, so why would he link back to that October post now?)

Let's see where else he went wrong... he also claimed (back in October) that the fallout from nationalizing the big banks would have hurt the Obama Administration's chances of passing Health Care Reform, but what support did the administration get from pro-banking Republicans after NOT nationalizing the big banks? And now that the administration has NOT nationalized the big banks, what further help can they expect from conservatives on FinReg and environmental legislation? None is a pretty good starting -- and ending -- point, if you ask me.

Again, this was another supporting leg of his anti-nationalization platform in October of last year but, like the stress-test leg, was chopped off, which means he shouldn't still be linking to that October post or pushing his anti-nationalization beliefs.

The other two legs of his platform rest on questionable views which deserve further scrutiny as well. The first is that it's okay for the FDIC to dismantle failing and insolvent small banks but it's not okay to do the same to failing and insolvent big banks. Nationalizing a big bank is not any different than how the FDIC breaks up small banks so how can he justify one but not the other? Sweep away that third leg if you want to, but for the sake of argument I'll be nice and leave it standing.

Which brings us to the fourth and final leg. He made the point that since the Treasury's stake in Citi had moved into the black by $7 Billion the Treasury should get out of the trade and get their money back. He felt that by leaving the money in any longer they were simply speculating and he was using the profits of the trade as a final justification for not nationalizing the big banks. This is a really important point because it gets at the real flaws in Salmon's thinking. He's viewing the Treasury as if it's a for-profit organization, but it is NOT a for-profit organization with a fiduciary duty to "maximize taxpayer wealth" in the same way a corporation has a fiduciary duty to maximize stakeholder wealth.

Instead the Treasury's duty is to protect taxpayers from economic collapses, bank runs and financial crises... in short their duty is to foster and create an environment that's conducive to "maximizing taxpayer wealth" through for-profit ventures. So Felix is wrong when he claims the Treasury should get its money out now that it's in the black. After all, they shouldn't be looking to maximize their returns, they should be looking to stabilizing the economy. And since Felix got his wishes and Obama and the Treasury went the anti-nationalization route, then he (like the Treasury) should stick to his guns and push for recapitalizing the Death Star as quickly as possible so that taxpayers can get back to enjoying a free, fair and productive economy. If he believes not-nationalize was the right way to go, he should also realize that the current profitable position the Treasury holds in Citi should be used as a capital buffer and loss reserve to write down the 2nd Liens chewing a hole in its balance sheet. If the Treasury does anything else (like take their profits now, for instance) all they'd be doing is forcing our largest bank to hold losses on its books, a la Japan during their lost decade. Believe me, I'm wholeheartedly for nationalization when a huge bank is on the brink of failure, but I also realize it isn't going to happen, so isn't it in the better interest of the taxpayers that Citi take the Treasury's money and use it productively? If the Fed wants to create a fair and equitable environment for helping taxpayers grow wealth then they also have to realize they're in a race against time because the gruesome way they're recapitalizing the the banks now is a scheme that isn't sustainable.

What's the Yield Curve Signaling?

2010-04-01T20:04:00.002-04:00

Paul Krugman recently put up a post arguing against inflationary fears by stating that, because we're up against the zero-bound on short-term rates, the yield curve is not currently pricing in inflationary expectations. Since long term rates can't be negative, the yield curve has to be upward-sloping. Jake, over at Econompic followed up Krugman's post by running a simulation which further highlighted that yield curve steepness is also a result of being up against the lower bound.

I agree wholeheartedly with them that inflation fears aren't currently priced into the yield curve, but both of them missed the chance to point out other reasons for a steepening yield curve.

First of all, they both assume rates reflect future expectations. And, of course, they do to some degree, but not in totality.

Institutional investors purchase treasuries with specific yields to match maturities on expected redemptions, payouts etc.

Liquidity Preference Theory also plays a big role in the yield curve and I imagine there's a wide swath of investors out there who want a more liquid, short-term investment rather than hold the long bond. Why? Well, with signs (generally) pointing to some sort of recovery, investors don't want to get locked into long-term, low-yield treasuries if they feel a better return in emerging markets (for instance) is just around the corner.

I must admit that Pure Expectations Theory is the most widely-held view of why the yield curve is shaped the way it is and why it's steep or flat. But, in reality, there has to be accounting for the other two theories as well... and all three can be used to combat the inflation hawks.

FinReg for ARMs?

2010-03-31T19:52:00.003-04:00

Just a quick muse that will probably only interest me.

In 1982 Ronald Reagan pushed for, and passed, the Garn-St. Germain Act. This effectively ended the era of fixed-rate mortgages and ushered in the era of Adjustable Rate Mortgages. This, in and of itself, wouldn't be such a bad thing. Plenty of homeowners have used ARMs successfully to buy a house.

However, Reagan's war on regulation also included (in the same act) the deregulation of Loan-to-Value restrictions, which meant mortgage lenders could loan borrowers more than the value of the house in an ARM loan. And so now the benefits to the average homebuyer of the Garn-St. Germain Act start getting murkier.

But the next step of Reagan's war (which came, again, within the same act) was granting mortgage originators the ability to 'distribute' or sell the mortgage after they'd originated it. And with that, it's really clear that Reagan's war on regulation didn't benefit the average homeowner nearly as much as the mortgage and banking industries.

None of this is news to most people, but the Garn-St. Germain Act got me to thinking about what the Obama Aministration is considering as far as Financial Regulation (FinReg) as we move forward. There have been a lot of ideas bandied about regarding the banking sector and how to pass effective legislation that regulates it... including limiting the size of the banks relative to our GDP as well as a Consumer Financial Protection Agency to regulate 'vanilla' products like credit cards and auto loans.

However, I don't recall seeing any proposal that really gets to the heart of the twin problems of boom-and-bust cycles (as illustrated best by Charles Kindleberger in Manias, Panics & Crashes). He pointed out that asset bubbles historically correlate with housing bubbles but that asset bubbles on their own, are rarely as damaging as housing bubbles. So why not target some of the causes of housing bubbles with FinReg rather than target the banks who create them?

Why not get rid of the "originate-to-distribute" allowance for ARMs? Or, if we can't move that far, how about severe restrictions on distribution of ARMs? For instance, the originator is required to hold the mortgage for the same length of time AFTER the reset date as before? Seems to me like a pretty good way to ensure the originators will start paying more attention to who they're lending to, right?

Of course, this isn't to say that I'm against restricting the absolute size of the bank itself, or that I'm against regulation of derivatives (naked CDS are basically ridiculous) but considering the investment banking industry as we know it (1980-2010) was largely created by their ability to securitize, sell and trade mortgages, why don't we target the major source of one of our problems first?

Muphry's Law Strikes Again

2010-03-30T13:26:00.005-04:00

Mark Liberman over at the Language Log links to a post about spelling rage (warning NSFW words in large type). The post is somewhat humorous, and worth reading but I noticed that it suffers from Muphry's Law. Muphry's Law (not to be confused with Murphy's Law) clearly states that when someone is critiquing spelling, grammar or punctuation they'll inevitably have a spelling, grammar or punctuation mistake in their critique.

Case in point, when talking about commas: "...you always want to put a space after him when you use him a sentence."

That sentence is missing the word 'in'.

Links

2010-02-18T11:30:00.002-05:00

Interesting article by Matt Taibbi about Goldman Sachs. Taibbi uses colorful language to describe Goldman and was the guy responsible for coining the "Vampire Squid" nickname for Goldman.

Completely unrelated... a nice video by Stargate Studios showing how much green-screen work is used in TV shows these days.

Pikachu Snow Plow

2010-02-10T16:55:00.003-05:00

Wish I had one of these right about now... after five feet of snow (and counting) in the last five days here in Philly, my lower back is killing me.

Via Tyler Cowen

My Odds of Dating a Supermodel

2010-02-10T00:33:00.003-05:00

Well, my odds of pulling off this miracle would be 1 in 34 if I moved an hour north and made a little bit more money... and there's a chance my odds could be as good as 1 in 7!

Via Book of Odds:

The first problem with trying to figure your odds of dating a supermodel is trying to define what separates a regular model from a supermodel, and then figuring out how many supermodels are out there. Luckily for us, Stars-Portraits.com has a list of supermodels, so we'll just use that as our basis. Stars Portraits counts about 320 supermodels, which seems like a reasonable estimate.

There are about 116 million males 15 and older in the United States, and about 57 million are single. If each of them had the same odds of dating a supermodel, and we assumed that all the supermodels on the list were unmarried and would date an American, your odds of dating a supermodel would be somewhere around one in 178,100. That's not so good.

But it also ignores that different people will have vastly differing odds. A farmer living in Indiana is not very likely to meet, let alone date, a supermodel. If you really want to date a supermodel, there are a couple things you can do to better your odds:

Move to one of the two fashion capitals of the United States-New York or Los Angeles. The combined population of males 15-and-older in those two cities is about 4.6 million, and of those, just 2 million are single. Already, just by moving, you've improved your odds almost 30-fold, to around one in 7,127. That's still a very low number, but it's better than what you had before.
Become professionally successful. While it is difficult to precisely define success, the highest income group reported by the US Census is those with incomes greater than $100,000 so that's what we'll use. Though we do not have statistics for New York and LA specifically, nationally, 1 in 15.36 men who live alone (because a supermodel presumably wouldn't want to date a guy who lives with a roommate, or in his parent's basement) have an income of at least $100,000. So being successful will improve your odds to around one in 150. It's still a long shot, but compared to our first guesstimate, things aren't looking so bad!
There are two additional factors which are out of your control, but if you have them going for you, your odds can potentially get even better.

You are tall. Given the height of supermodels, it is unlikely they'll date a man shorter than six feet tall, unless you are the head of a major power, like the 5'5'' Nicholas Sarkozy, who is married to the 5'9" Carla Bruni. 1 in 5.05 American men are at least six feet tall, so if you're lucky enough to fit into that category, your odds of dating a supermodel might increase proportionally, to about one in 34.
You are good looking. Economic and psychological research has shown that attractive people are more likely to date and marry other attractive people, so if you're good-looking it stands to reason that your chances of being with a model are much improved. Supermodels are some of the most beautiful women on the planet, so they won't just date anyone, for the most part. Let's guesstimate that they will generally only consider you a serious prospect if you're in the top 20 percent of the best-looking men in the room. In that case, your odds might increase to one in 7. Considering that we started at one in 178,100, things are looking pretty good.

The Greenspan Moment?

2009-10-07T10:42:00.001-04:00

Paul McCulley of PIMCO coined the term Minksy Moment to describe the point in a credit cycle or business cycle when investors have cash-flow problems due to spiraling debt they've incurred in order to finance their speculative investments. It's at this point that mass sell-offs begin due to the fact that nobody else can be found to bid at the current high prices. The collapse of the housing bubble in 2007 is a perfect example of a Minsky Moment.

A Minsky Moment is a nice description of how a bubble collapses. But after the financial crisis happened in 2008, I believe there should be another "moment" named: it's the moment that policy makers, economists, bankers and politicians forget how fragile all economies are. It's the moment they forget the lessons of history (and all the bubbles from Tulip Mania to the dot-com crash). It's at this point, when the regulations put on the financial industry by the survivors of previous panics, are unwound. It's the point at which a new generation--which has enjoyed the long-run economic benefit their ancestors helped ensure--end up making the same mistakes their grandparents and great-grandparents made. It's the moment at which people arrogantly believe that monetary policy (or some other force) can stave off depressions. It's the moment that arrogance overtakes rational economic analysis (and knowledge of history). Going forward, I propose this moment be called the Greenspan Moment.

50-years after the Great Depression (from 1931-1981) the country experienced another major financial crisis (the S&L scandals). 70-years after it, politicians repealed Glass-Steagall. And 80-years after it, the country stood on the precipice of another depression.

Will this happen in the future?

Looking back at all the financial panics and crashes in history, I'm guessing yes. We can expect Ben Bernanke to be very heavy-handed with monetary policy in the future. He'll do his level best to control asset bubbles and dampen irrational exuberance. There will be new financial regulations instituted such as counter-cyclical leverage ratios at banks. Bernanke's eventual successors will probably also have lived through the Great Recession and they'll continue the vigilance against asset bubbles, shadow banking and deregulation. But then, at some point in the future (50- or 60- or 80- or 100-years from now) there will be a Greenspan Moment. It will be the moment when the lessons are forgotten, regulations are relaxed and the next crisis happens. Mark my words it will happen. And it needs a name. I only hope that, after the next Greenspan Moment, celebrated economists don't once again forget the lessons of Keynes and fiscal spending.

Stimulus Questions

2009-10-06T21:53:00.003-04:00

Nobel Prize-winning economist Paul Krugman recently opened up his blog for questions from the readers. He answered a few and the entire Q&A is online and it's educational for those who have questions about the stimulus, the recession, health care, etc. He's a smart man, and his answers are obviously well-thought out and intelligent. Go read what he wrote.

But, unfortunately for me, he didn't answer the question I asked, so I asked my question again, but this time I asked it in the comments section of Brad DeLong's blog (Professor DeLong is an equally intelligent economist) but alas, no answer, yet.

So I suppose I'll write my question(s) here and see if anybody stumbles across it in the future and can shed light on some of these issues for me.

Firstly, regarding the stimulus: Government spending in WWII is what pulled the United States out of the Great Depression. It proved Keynes correct and validated most (if not all) of his theories that fiscal policy could fill the output gap between real GDP and potential GDP during a recession (or depression). However, the world looks very different today than it did in the 1940s and I'm not concerned about the short-run equilibrium of AS-AD or of the effects of the stimulus on real GDP. My questions concern the Long Run Aggregate Supply Curve (Potential GDP).

The "stimulus" of WWII set the stage for long-run economic prosperity in the United States, but the postwar boom here was also fueled by interest payments the United States received from England and Germany. In fact, there was interest earned on interest in some cases, as we loaned money to Germany who had to pay war reparations to England who was in debt to the United States. In addition to these interest payments from other countries, the debt that funded WWII's spending was largely internal debt--meaning the United States went into debt to its own citizens for the most part. But now, however, there is a much larger percentage of US debt owned by sovereign funds (some estimates claim sovereign purchases of US debt has reached nearly 40%).

In the end, my questions are: What does this mean for the long-term recovery? Will potential GDP be lower because a large portion of government debt is given to foreign countries? Does this lower "I" or "G" or neither? Does it matter? Will the new, lower LRAS slow immigration and investment in the US and re-direct capital and resources to growing economies? Will the US, after this collapse, emerge from the crisis much the same way England did from WWII--meaning a sort of economic decline that lasts for a decade or more, accompanied by eventual replacement as the world's economic superpower, while foreign countries like China and India rise? Did Christie Romer include the sovereign purchases of our debt and the interest-on-interest we earned after WWII in her multiplier calculations for the ARRA? Is there an automatic offset to the sovereign funds and interest-on-interest by the TYPE of spending in the ARRA?

What I mean by that is: Keynes proposed that stimulus spending should be spent on useful things if possible, but completely wasteful things if necessary. He proposed burying money in mineshafts so that workers would be hired to dig it out. And WWII's stimulus spending was really no different than wasteful spending because in the end, as Bruce Bartlett so aptly put it:

"WWII proved to be an effective stimulus that, economically speaking, consisted of 100% waste. If the war hadn't broken out, the US could have enjoyed the same economic benefit of the stimulus by building all the tanks, planes and bombs and simply dumping them into the ocean."

So, will there be natural offsets in the ARRA on the "interest and sovereign fund" issues because of economically useful stimulus spending? And, again, how much of this was calculated by the ARRA's creators? And, finally, as I asked Dr. DeLong... what is the air-speed velocity of an unladen swallow?

Reaching Escape Velocity?

2009-10-05T12:11:00.002-04:00

As I'm currently out of work, I went to the annual CFA networking day here in Philadelphia, last Friday. Most of the exhibitors said they were currently only hiring "replacements" (people who had retired, moved on, etc.) so it wasn't a great day for me professionally so, as usual, I was more interested in the speakers and the panel discussions.

The keystone speaker this year was Tony Crecsenzi, Senior VP at PIMCO. He began his speech by talking about the economy and the chance that it will reach escape velocity from the recession by 2011. He outlined the pros and cons of the Fed's actions, the TARP and what effects the stimulus will have, all without giving his opinion. Then he asked for a show of hands from the audience (about 250 CFA Charterholders and Candidates) if they thought the economy would reach escape velocity by 2011 without further stimulus. Only two people said yes, the rest of us said no--that we'll need more stimulus.

This may, or may not, be surprising to most people, but it was surprising to me. Most of the CFAs and MBAs I know are fiscal conservatives--typically against government spending. However, CFAs are usually more quantitative in nature, with a higher degree of financial literacy than most (even over MBAs) so perhaps they understand the economy in a much more detailed way than the average financial industry worker.

Crescenzi finished his speech by highlighting a drag he forsees on the growth of the economy in 2010 and 2011 -- the expiration of the Bush tax cuts -- and perhaps a bright spot for further stimulus. Without further stimulus, he believes the economy won't reach escape velocity by January 1, 2011 (when the Bush tax cuts expire). But the mid-term elections (he believes) typically see the ruling party lose seats in Congress. With the economy still dragging by then, the tax cuts will have to be extended (an unfavorable proposition for Democrats) so perhaps it will force them into action on a second round of stimulus. Well, fingers crossed I guess. I need a job sometime before 2011.

Here are the guts of Crescenzi's speech if you're interested.

Wal-Mart vs. FEMA

2008-12-05T15:20:00.002-05:00

I read this not-very-interesting research paper today that compared Wal-Mart's response and FEMA's response to Hurricane Katrina. The reason why this paper isn't particularly interesting is because, as we all know by now, FEMA's response was just awful. In fact awful is probably an understatement. It might even a little generous. Actually, if all Wal-Mart did was ship half a carton of Ramen noodles to New Orleans, they would still have beaten FEMA's response by a mile (FEMA's head, Michael Brown, apparently didn't realize that many of us would consider waterboarding of displaced 9th Ward residents an "ineffective response").

All kidding aside, you can read the report if you want but I'm sure you won't find it enlightening. What you may find dis-enlightening, however, is the report's conclusion... that the government is incapable of responding to disasters and therefore FEMA should be replaced by Wal-Mart. Ummm... what?

I've written about this type of cynical assumption before - that conservatives in power purposefully wreck the government then turn around and point at the wreckage as proof the government doesn't work. Horwitz's paper does exactly that. It celebrates the Wal-Mart response as proof the private sector should be allowed to run everything and that the government should step aside.

It's typical that Dr. Horwitz, a conservative professor who has previously blamed the entire financial crisis on Fannie/Freddie and the Community Reinvestment Act (both of which are debunked Republican talking points), would leave no room in his conclusion for managing FEMA properly. He doesn't care that governments in other countries work just fine or that the government's response to 9/11 worked well. As a free market champion Dr. Horwitz's response to any governmental failure is proof the government doesn't work rather than proof this government doesn't work. So his concluding proposal is for future administrations to seriously consider more outsourcing to private companies rather than for future administrations to fix the wreckage Bush created.

Strangely, what's missing from Horwitz's report is the examination of the millions the Bush administration doled out to private companies like Bechtel, Halliburton and Gulf Stream Coach, all tasked with rebuilding New Orleans. Where, I wonder, is the report on the private sector's efficiency regarding the rebuilding effort? Well, perhaps Horwitz is happy to see free market efficiency at it's finest -- after all, what's more profitable or efficient than for Bechtel to take piles of money without actually y'know doing anything with it? That's the absolute pinnacle of profitability. That's a free lunch. Money for nothing. Arbitrage. All hail the efficiency of the private sector...

...in the meantime, please just look the other way on accountability, since none of these private companies will be held accountable for not actually doing anything with taxpayer money.

Truly Useless Information

2008-12-04T14:20:00.007-05:00

Free Exchange has an interesting post today about Insidious MBAs. It adds to the general sentiment in the comments from my last post on the subject -- namely that MBA students arrive at B-School with no morals (or an amoral world view).

Shortly after the Enron debacle [my professor] asked me how business schools could better teach ethics to help reduce such behaviour in the future. I told him you cannot teach ethics to MBAs. By the time you're an MBA student (typically mid to late 20s) you're either an ethical person or you're not. No business school class can make you realise embezzling money is wrong if that's your inclination.

I agree with that sentiment but will add that MBA professors are definitely trying their hardest to turn out highly moral individuals. Nearly all our professors dispense lessons and teach with an almost heavy-handed approach to morals. The types of books we're given to read (especially in the more qualitative classes like HR, Management, Leadership) when not conveying direct strategic lessons often extol the benefits of highly virtuous management. Gentle, magnimous management styles are encouraged and case studies back up the benefits of leading in such a way. The benefits of corporate social responsibility and the stupidity of trying to defraud customers or shareholders is a constant, constant, constant drumbeat.

Professors should be applauded for their work in this regard, but what if examining bad moral decisions isn't enough? Mark Thoma points to the problems with financial engineering and says MBAs and Financial Engineers may not be learning enough (or enough of the right stuff) as it is. As his post notes, and as Nassim Taleb has famously decried in his book The Black Swan, our Financial Engineering program teaches Black-Scholes up the yin-yang but little else, but Black-Scholes is a formula that doesn't translate beyond academic mathematics -- it simply doesn't work in the real world.

So the FE students and the brave few MBAs who took this class have spent four months studying their brains out for nothing. This, despite the fact that our derivatives professor admitted to the class yesterday that, as a former engineer, he's quite familiar with Nyquist Sampling, Brownian Motion and Mandelbrot's fractals and could probably teach them.

Why he hasn't adjusted the program until now is probably because there has been no demand on Wall Street for quants with knowledge of these theorems. I recall an old Jack Welch speech from a few years ago to a bunch of students about how the market shapes what kind of MBA students the b-schools churn out. If the market wants quants who only know Black-Scholes, then that's what the b-schools will deliver. Why would academia bother to teach them something different when Wall Street only wants Black-Scholes disciples? Students won't get hired, paid a ridiculous salary and be able to give a portion of their piles of money back to the school if their skill sets don't match what Wall Street wants.

I suppose I might be one of the last MBA students to learn Black-Scholes. It would seem the financial world is changing and with it, B-School curriculums will change as well. This is obviously disheartening to me for more than a few reasons, but it's mostly frustrating because I could have completely skipped derivatives (which has, by far, been the most difficult and challenging class I've had) and still earned an MBA in Finance. Derivatives is an elective course for us MBAs, and only a required course for the FE students.

So I could have easily graduated without putting myself through learning a difficult skill set I'm never going to use not just because it's out-of-vogue but because it's also completely useless.

Awesome. None of this is helping me study for the derivatives final I have in two weeks.

Highbrow Blogging

2008-12-02T03:19:00.006-05:00

So I saw this blog readability site the other day (hat tip: JES) and at first I was happy about the props it was giving my writing skillz, but then I became concerned. I started wondering what kind of rating system it's using and what my rating should mean to me.

JES and others haven't been happy with their ratings and, to be honest, at first I was hoping for a Double Doctoral Degree Rocket Scientist rating. So I conducted thorough analysis of the software (and by 'thorough analysis' I mean 'drank beers while watching tv') and concluded that the readability test works perfectly well. The system rates blogs based purely on readability and doesn't rate content at all (which should have been obvious to me since it's called a blog readability test).

Anyway, after realizing this, my rating concerned me because it could be a sign that my posts are not as clear and concise as they should be. To test my hypothesis I ran the blogs of Brad Setser and Felix Salmon (smarty pants, finance bloggers I follow) through the rating system to find out whether or not I was right.

Nearly all of Setser's post require a Master's in finance or economics to properly comprehend, and a healthy portion of Salmon's require the same. But their blogs were rated as High School and Junior High respectively. To me, these ratings undoubtedly proved the system was rating writing style and not blog content.

What does this mean for me? Well, Setser and Salmon boil down exceedingly complex financial arcana into readable articles that high schoolers can understand. I turn fart jokes into scholarly dissertations. Setser and Salmon write about derivatives, leveraged financial intermediaries, fixed income arbitrage and illiquid securities while, most of the time, I'm just trying to find excuses to write the name Dick Butkus.

I suppose I could find my blog's rating flattering. On one hand, it shows I'm in rarified Joycean air -- Finnegans Wake, after all, was nothing more than a 650-page fart joke gone horribly wrong. But on the other hand, how many freakin' people have actually ever read Joyce? Sure we all like to lie and say we have, but we haven't. Nobody has. And the few who have are usually insufferable. Anyone who's read Finnegans Wake cover-to-cover is so bitter at having lost numberless hours to reading and trying to decipher Joyce's fart-joke prank that they have to act like it's scripture afterwards to save themselves from psychosis.

Is this the future of my blog? Are these the type of readers I have? Am I reading way too much into this readability test? Who knows... but on a more serious note, what do you think Dick Butkus's blog looks like?

Amoral MBA Students

2008-11-20T16:05:00.006-05:00

MBA students, perhaps not to anyone's surprise, are cheaters. MBA students cheat on the GMAT's so they can get into top B-Schools. MBA students also willingly admit to cheating once they're in B-School, and MBA students obviously act amorally and immorally once they're out of B-School.

Keep this in mind as I present the results of an informal, professor-administered poll taken in my Derivatives class this Tuesday. The class discussion began with talk of everything that's been happening lately, as usual, and the professor believed illegal actions will eventually come to light regarding actions at the Wall Street firms (pressuring ratings agencies, exchanging favors for good ratings on toxic CDO's etc.). Some students expressed anger at the immorality of it all, others questioned whether anything illegal had actually happened or whether it was simply irresponsibility that caused it all. In light of the class discussion, the professor presented a class with the following situation:

You work somewhere in the finance industry nine months from now, and I present you with an opportunity to make $5 million. However, you have to do something illegal to get the $5 million. The chance you'll be caught for doing this illegal act is 50%. Further, the maximum sentence you'll receive is four years and the chance of receiving the four years is also 50%. No matter what happens, if you're caught and sentenced to three years, you'll still get to keep the $5 million. Would you do it?

Almost everyone in class raised their hands.

Here are the demographics of the class, as best I can guess. It's a mixed class with both MS and MBA students since Derivatives is an elective for MBA-ers. The class size is roughly 90 students, all ranging in age from 26-34 (my best guess). The mix is approximately 50% Asian and South Asian, 40% American (all races) and 10% other (from the accents I'm guessing Russian, German, South American and Latin American). Males comprise about 70% of the class.

There were little demographic differences among those who raised their hands, at least as far as I noticed, other than the few married women who didn't. If you must know, I also raised my hand, but it's not a static answer for me. I'm on the upper end of that age range and four years is a long time for me to be rotting in a jail cell. I've got friends and family I love dearly and wouldn't want to miss seeing. I'm also certain that if I figured out who exactly I'd be damaging with my immoral / illegal actions, I might not follow through. I find it's a lot easier to answer "yes" to a question of an illegal act when the question is asked in a void, but it's also much tougher to actually follow through on that act in real life.

All this is beside the point, however. MBA Students (and MS - Finance students) are supposed to be smarter and (I suppose) less immoral than rest of the world. I imagine the results of this poll would skew quite high if given to the population at-large, but the class this poll was asked of are supposed to be future leaders -- future leaders of large corporations that will hold the financial well being of tens of thousands, or even hundreds of thousands of workers' lives in their hands.

All the students wrote essays to gain admittance to school, and all their essays discussed the "good" they'd like to do in their future career as well as the unique and interesting career paths they believe that earning an MBA will open for them (management consulting and investment banking, at the time the essays were written, are unique?).

Anyway, nearly all the students I know are in B-School to make more money. There are few non-profit, humanitarian types in the program but for the most part we're all here just to earn larger paychecks. That's it. Plain and simple.

So basically, 90% of MBA students are not just generally a bunch of cheats but also liars since their admissions essays were anything but honest! And yes, I'm completely comfortable extending generalizations to every B-School and MBA student in the country after the completely unscientific and informal polling I conducted at mine. I wonder if, when they're reading the admittance essays, the adcoms aren't just looking for the most riveting piece of fiction they can find since we all lied about our future hopes to save the whales and the rainforest? Well, maybe after we make our first $100 million we'll have whaletanks installed in our mansions and rainforest terrariums installed in our million dollar greenhouses, thereby following through on the empty promises we wrote in our essays.

All this pretty much got me wondering whether financial gain attracts the amoral / immoral or whether the amoral / immoral are attracted to financial gain? I have to admit that I give the professors a lot of credit for trying their hardest to sway us and the HR Profs do an especially admirable job in this respect, but if the students are already money chasing cheaters, what difference can a few enlightened lectures make?

Anyway, in the wake of the meltdown and news items claiming MBA degrees are no longer worth it, I'm really starting to think I should have earned my Master's in something less sleazy, more honest and more respected.... like law! Hey, at least I'd have a job next year prosecuting all those immoral MBA-ers who caused this mess.

NFL Overtimes

2008-11-18T16:52:00.007-05:00

There's a lot of animosity in the local media here in Philly directed toward Donovan McNabb for not knowing that NFL games can end in ties. Presumably, McNabb might have played differently if he'd known that games can end in ties but I don't want to weigh in on that debate. Instead, I'd rather ask why the NFL hasn't converted to the college system? NFL overtimes don't grant equal possessions to each team (which has been a problem for a long time), and the sudden death format is unfair because of this.

College overtime games can sometimes have ridiculous 70-69 scores if there are multiple overtimes and the league probably doesn't want to invalidate old touchdown, yardage and scoring records, but there are ways to ensure the scoring doesn't get blown out of proportion in "equal possession" overtimes.

The easiest way to do this is for the NFL to adopt the college model but simply adjust it. NFL teams should begin the 1st overtime with equal possessions from the 20. Then from the 30. Then from the 40. Then from the 50. The second overtime should, like college, require a two-point conversion if the team scores a touchdown. It's still possible overtime games could end up with high scores, but the chances under this kind of system would be greatly diminished while satisfying the "fairness" problem of the current overtime system, providing fans a much more exciting game and also eliminating ties (something I think American sports fans hate more than losses).

Update: Apparently McNabb also didn't know that playoff games and SuperBowls don't end in ties. Which makes me wonder what he thought would have happened then? Did he think teams that end up tied in a playoff game both advance? How miserable would that be for the poor third team that has to play the other two??? Sheesh...

Good Financial Innovations?

2008-11-18T01:24:00.002-05:00

I missed the opportunity a few weeks ago to offer my thoughts on the debate between Dani Rodrik and Steve Randy Waldman about financial innovation. Rodrik sparked the debate by asking for:

... some examples of financial innovation -- not of any kind, but the kind that has left a large enough footprint over some kind of economic outcomes we really care about. What are some of the ways in which financial innovation has made our lives measurably and unambiguously better?

My answer to Mr. Rodrik would be... Mortgage Backed Securities.

Unbelievable huh? How can I possibly say Mortgage Backed Securities are financial innovations that have made our lives measurably and unambiguously better?

Well, I can say it because the creation of the secondary mortgage market has been invaluable to millions of Americans (perhaps even hundreds of millions). By creating a secondary market for mortgages, more people are able to borrow to get the home they want. MBS's allow regional banks to diversify their mortgage pools and stay afloat, even if tough economic times hit their region. For instance imagine if, in sunnier economic climes, the automakers collapse but no secondary mortgage market exists. All the Michigan autoworkers would default on their mortgages and the regional banks holding all those mortgages would also fail (if the banks had been willing to lend to everyone in the region in the first place). The domino effect caused by failing banks in a state that's also decimated by job losses would be catastrophic. Failing regional banks would cause "Main Street" problems on a terrible scale for whatever region they're in. But by packing up mortgages and sending them somewhere else (or by buying mortgages from a different region), the regional banks, and the region itself, are more insulated and protected from this kind of catastrophic failure.

What we have to understand (and what Mr. Rodrik should understand) is that the ability to securitize a mortgage has been exploited and although Mortgage Backed Securities are now seen as tools of financial destruction they've probably helped every homeowner who is reading this blog to buy their home.

Financial engineering instruments are tools, plain and simple. They're neither inherently good, nor inherently evil, they're just tools. So the right question isn't "what financial innovation is good?" The right question is, "How do we stop shysters from using financial innovation for evil?"

After all, nobody asked whether or not airplanes were good after 9/11. We asked how to stop terrorists from flying them into buildings. The current situation is no different. There are a huge range of financial innovations that offer loads of potential benefits to millions of people both directly and indirectly. When I pull out my "FE toolbag" (if you will), I'm able to structure payments and cash flows from any investment in any way imaginable. Smooth cashflows from an investment are incredibly helpful and desired by every business on the planet.

But, as the good finance profs teach, all financial engineering relies on prior assumptions about the underlying investment. If your assumptions are wrong, then your FE instruments won't matter in the least -- and might actually exacerbate your problems. Financial Engineering in its (relatively) short rise to popularity, has instilled a lot of false confidence in the investors who have used them. First it was Salomon in the '80s, the LTCM in the '90s and then (apparently) everyone in the 2000s. All these people, at some point in their use of FE instruments, either believed they had successfully engineered their way out of danger, or had magically FE'd their way into fantastic profits. They all forgot, or didn't care, that if the assumptions about the underlying investment are wrong, then all the FE instruments in the world won't matter in the least when the piper comes calling.

Now then, I can understand if Mr. Rodrik, and others, want to say that FE instruments have no value because accurate predictions about the future of any investment are a crap shoot at best... but that's a completely different argument. The argument should be whether or not we can stop the exploitation of financial innovation for profit (and also the disturbing tendency of risk managers to blindly trust derivatives as perfect hedges). It doesn't matter whether the answer to this problem is oversight and regulation of the instruments, oversight and regulation of the people who use them, or even if the eventual answer is a consensus that abolishment is the only way to stop their abuse. In the end, the only thing that matters is making sure financial innovation isn't abused anymore.

And if, in the end, we can't stop people from profiteering through financial engineering tools and abolishment becomes our only answer, then that says more about human beings (and the MBA whizzes on Wall Street) than it does about the instruments themselves.

Fear and the Liquidity Trap

2008-11-15T15:17:00.007-05:00

Paul Krugman put up his analysis of liquidity traps and how he thinks they can be stopped. I love Krugman but I think his use of expectation theory (as to how it relates to the money supply) is a little off base. Expectations about the future of the economy and expectations about future job security are what drive future spending (or cash hoarding) much more than expectations about the future of the money supply or future monetary policies.

Krugman believes the government has to fool the public into believing it's going to keep interest rates low and the money supply high almost indefinitely to avoid a liquidity trap. If sufficiently fooled he believes this will lead to spending and will stop people from hoarding cash.

I find this hard to believe. Fear of unemployment and fear of future economic conditions are greater fears.

Economists tend to look quite a bit at the unemployment rate when calculating the severity of a recession, but the duration of an inflated unemployment rate is just as important. US Unemployment spiked to over 25% in 1932 and remained above 14% for nearly 10 years (from 1930-1939). Contrast that to our non-Great Depression high of just over 10% in 1982, that lasted less than two years.

An inflated unemployment rate of 10% that lasts for more than few years affects more than just 10% of the workforce. During that time, it's not a constant 10% of the people who remain unemployed, but rather a revolving, cycle of workers gaining and losing jobs that ultimately affects a much larger portion of the population. People who have lost their jobs, fought for another one and then lost it again will have a hard time being convinced that jobs and money are future guarantees. People who have experienced a decade long cycle of this may never be convinced again. Which goes a long way toward explaining why Great Depression survivors hoarded cash their whole lives.

Okay, so that helps explain the Depression, but what about Japan in the 1990s and their liquidity trap? Their recession was not nearly as deep nor as long as the Great Depression, so why the liquidity trap there? Why did it take ten years for their people to resume spending and producing? Well (and I admit this theory may be a bit of stretch) the Japanese are a different culture.

They're a small, tightly-knit group of islands that value honor and work above most else. Japan's population is a largely homogeneous group that holds a collective devotion to 'honor' and views the loss of a job and the loss of money, as disgraceful and dishonorable. Failure is nearly always viewed as a personal flaw in Japan as opposed to we Americans who frequently blame everyone and everything else failures. The Japanese worker's ability to provide for his or her family in the future, and the loss of their honor if unable to do so, resulted in hoarding of cash when the country faced economic uncertainty. There are, of course, a number of other factors and more hard and concrete evidence that the Japanese government may have flailed a bit during the years following the Asian crisis and that may have exacerbated the problem, but taken together with the Japanese mindset so fixated on honor, it seems likely that a liquidity trap couldn't be avoided.

In short, I believe the length and duration of the coming recession are what could potentially cause a liquidity trap in the United States, not misdirected fiscal policy or wrongheaded government spending. If (as the Austrian Economists like to say) the boom leading to the collapse is sufficiently large, then the resulting recession will match it in length and depth. So if this recession is long enough and deep enough, and if consumers weren't saving enough during the boom period, then nothing will stop the recession from being deep and long. The end result could quite possibly be a universal skittishness, constant fear and a lifetime of uncertainty about the economy that will haunt the recession's survivors.

My grandparents and great grandparents are perfect evidence of this. They lived through the Great Depression and those years affected them so deeply that they really never increase their spending for most of their lives. They put their money in CD's, low-risk bonds and savings accounts that, most of the time, didn't beat inflation. My American grandparents, in particular, were doing this until their recent passing just a few years ago. No amount of fiscal or monetary policy or even decade long booms convinced them of the resilience of the US economy, nor did long, sustained booms convince them that jobs and money weren't impermanent, ephemeral things. In short, they were motivated to hoard by their fears just as the Japanese were motivated to hoard by their fears.

Let us hope this recession is not as deep and long as some fear (though Mr. Krugman himself was on CNBC last week predicting the recession and inflated unemployment would last through 2010 or perhaps 2011… yipes).

In closing, I'll leave you with a nice video of Peter Schiff, an Austrian School adherent who runs his own brokerage firm. Mr. Schiff is seen in the video predicting the recession and collapse and debating with Felix Salmon's personal enemy, Ben Stein (who appears particularly gas-baggy in these clips) about the economy and the value of financial stocks. Most of the people Mr. Schiff debates with laugh at him.

Oh, and lest you think I'm an Austrian School devotee myself, please realize I don't share their views about the uselessness of the Fed and government, in general.

What Happens if CitiBank Collapses?

2008-11-13T13:47:00.004-05:00

It's not fun being right sometimes. For example, I wrote a blog post in March, and another one two months ago, noting that the size of a financial institution has no relationship to its stability or long-term survival. Specifically, in both posts I lamented the size of CitiBank and wondered what would happen if the $1 trillion (now $2 trillion) bank were to collapse.

The FDIC cannot protect all of CitiBank's depositors if the massive behemoth of bank goes under. What's troubling is that it only took eight months for me to be proved correct. I thought it would take much longer.

I'll re-cap the brief argument I made about the Gramm-Leach-Bliley Act (GLBA), passed in 1999 that allowed banks like CitiBank to rapidly consolidate and grow so large. GLBA overruled the Glass-Steagall Act of 1933 which prohibited banks from offering investment, commercial banking and insurance services all under one roof.

When the financial crisis began in September, a lot of people actually praised GLBA since massive commercial banks like CitiBank and Bank of America could swoop in and buy the failing investment banks, thereby preventing widespread bankruptcies. I pointed out that panicky investors wouldn't be able to distinguish between losses in a bank's investment or insurance division vs. profits in the bank's commercial banking division. Panicky investors are likely to sell and scared depositors likely to withdraw their deposits if only one part of the bank is failing.

I noted that GLBA might indeed be beneficial in the short-term but that it was undoubtedly very dangerous in the long-term, and, like a broken record, I noted that size wouldn't save a bank from failure. I honestly didn't think it would only take two months for me to be proven right.

CitiBank is currently in the crosshairs of the market and it will have extreme difficulty staying afloat as an independent bank. CEO Vikram Pandit elected to expand CitiBank during the crisis, hoping size would insulate him from danger, but that hasn't happened. And now CitiBank is not only too big to fail, but probably too big to save.

Here's Portfolio.com's Felix Salmon:

Citi might well turn out to be Hank Paulson's largest and biggest headache. There's no one he can sell it to -- it's far too big already. Which means that Paulson's only real option, if things deteriorate much further from here, is nationalization. Bits of it could be sold, at a price -- the retail bank to Santander, perhaps; other bits to JP Morgan or Goldman Sachs -- but the losses to the taxpayer would be enormous, and the disruption associated with breaking Citi up and then trying to integrate the pieces in the middle of a major financial crisis would likely be devastating to the economy.

This doesn't make me happy.

Conservatives in Power

2008-11-13T00:26:00.007-05:00

I recently provoked a politically-fueled economics debate on another blog that is neither an economic blog nor a political blog. As such I want to move any further discussion here. There were a number of questions floated by other commenters regarding the statements I made, but the one that drew the most criticism specifically, was a statement I made that laid a large portion of the blame for the current recession at the feet of George W. Bush.

I further went on to say that the conservatives in this country have recently splintered into a number of differing groups (social conservatives, free-market, laissez-faire Libertarian conservatives and even big government conservatives like Ron Paul).

I said it has become difficult to quantify conservatives across all classes, but almost all conservatives who reach a level of power in the federal government become free-market Libertarians who pray at the altar of Big Business. Dubya and the rest of the Bushies are the archetypes of this conservative Libertarian movement.

The Bushies have had such a collective admiration for business that, once in power, they did everything they could to systematically destroy the government and privatize everything. This isn't Sprizouse's personal conspiracy theory, but rather current 'ruling' conservative dogma. The bulk of this movement began in the 1980s with Reagan who realized that by wrecking the government, he could turn around, point at it and say, "Look the government doesn't work, we should privatize everything."

Let me borrow from Thomas Frank to best illustrate:

Misgovernment by the conservatives in power is the result of a philosophy of government that considers the free market the ideal of human society. This movement is friendly to industry not just by force of campaign contributions but by conviction. The movement believes in entrepreneurship not merely in commerce but in politics, and the inevitable results of its ascendance are, first, the capture of the state by business and, second, what follows from that: incompetence, graft, and all the other wretched flotsam that we've come to expect from Washington.
The correct diagnosis is the "bad apple" thesis turned upside down. There are plenty of good conservative individuals, honorable folks who would never participate in the sort of corruption we have watched unfold over the past few years. Hang around with grassroots conservative voters in Kansas, and in the main you will find them to be honest, hardworking people.
But put conservatism in charge of the state, and it behaves very differently. Now the "values" that rightist politicians eulogize on the stump disappear, and in their place we discern an entirely different set of priorities—priorities that reveal more about the unchanging historical essence of American conservatism than do its fleeting campaigns against gay marriage or secular humanism. The conservatism that speaks to us through its actions in Washington is a conservatism institutionally opposed to those baseline good intentions we learned about in elementary school.
Conservative leaders in Washington laugh off the idea of the public interest as airy-fairy nonsense; they caution against bringing top-notch talent into government service and declare war on public workers. They have made a cult of outsourcing and privatizing, they have wrecked established federal operations because they disagree with them, and they have deliberately piled up an Everest of debt in order to force the government into crisis. The ruination they have wrought has been thorough; it has been a professional job. Repairing it will require years of political action.

Frank's doomsaying is a bit further forward than mine. I don't believe the government is beyond saving, and two terms of a progressive agenda enacted by Obama and a liberal Congress should help. But I'm not going to try to predict the future, I'm just trying to point out how well Dubya followed the groundwork laid by Reagan. Bush consistently appointed incompetent people at the top of every agency in Washington, just like Reagan before him (remember James Watt of the EPA?).

Dubya put coal industry lobbyists in charge of the Department of the Interior, BigPharma guys in charge of the FDA and grossly incompetent men in charge of FEMA which helped the conservatives in Washington "outsource" the rebuilding of New Orleans to profiteering private companies (the ninth ward is almost completely rebuilt after only four years...ummm, maybe not).

Again, lest you think this is conspiracy theory, examine just a small collection of the Dubya appointments and judge for yourself.

Alberto Gonzales – Attorney General

Gonzales disgraced the Department of Justice as Attorney General by putting loyalty to the President above duty to the country.

Hank Paulson – Treasury Secretary

Bush put Paulson, a man so incompetent he doesn't understand the basics of balance sheets, in charge of the Treasury. This is the man in charge of the Treasury? A man who asked the American taxpayer to give him $700 million, no questions asked, no oversight?

Paulson is also the man who lobbied to have looser ibanking regulations (lowering of the net capital rule) and the right to leverage through the roof, all of which led to the financial crisis (as well as a large portion of the sub-prime mess created by aggressive investment bank lending).

Joe Allbaugh / Michael Brown – FEMA

Bush first appointed his campaign manager, Joe Allbaugh, to the head of FEMA despite the fact that Allbaugh had no appropriate emergency or management experience. Then Bush put Michael Brown in his place, a man who had never in his life managed more than two people, and whose career pinnacle to that point was investigating misconduct at horse shows.

J. Steven Griles – Secretary of the Interior

The Department of the Interior is set up to conserve and protect federally owned land. Griles, a former coal industry lobbyist lobbied for MORE strip mining during his lobbying career.

Scott Gottlieb – FDA

The FDA is set up to protect consumers from harmful drugs and food not properly examined for pesticides. Gottlieb was a former BigPharma guy who had previously been critical of the FDA. Gottlieb pressured scientists at the FDA to fast track drug approvals without rigorous research, and once halted a study on a multiple sclerosis drug after three patients lost blood and one died. Gottlieb halted the study saying it was "an overreaction" because the disease, not the drug was probably to blame.

Kenneth Tomlinson – Corporation for Public Broadcasting

Tomlinson was forced to resign after investigations found he was trying to push PBS news content in a more conservative direction.

Stephen L. Johnson – Administrator of the EPA

The EPA is supposed to be a watchdog on the health of the environment but under Johnson’s leadership the EPA has closed the EPA’s network of technical libraries without awaiting Congressional approval. The agency has also abandoned proposed rules protecting children and workers from lead paint and violated the Endangered Species Act in failing to consider the harmful effects of pesticides on salmon… the common thread in all these actions is service to corporate polluters above public health. But perhaps Johnson's greatest feat is his attempt to block 17 states from reducing greenhouse gas emissions and improving fuel economy… HE’S THE DIRECTOR OF THE EPA PEOPLE!!!

I could go on and on but I'm not sure it's necessary; I think the evidence is there for anyone to see. This isn't, as I've said misgovernment done accidentally, but misgovernment done on purpose, to create cynics of the public.

When we see these governmental disasters, the natural question we ask is, "Did these disasters happen because government doesn't work?"

But the question should be, "Did these disasters happen because THIS government and THIS governments fundamental philosophy doesn't work?"

As the '08 election (I think) indicated, Americans are starting to believe that it's Dubya's philosophy of government that doesn't work. The public's conclusion during the Reagan years, as well as the first four Dubya years, was that the government was patently incapable of functioning. But government obviously does work in certain circumstances, not to mention how well it works in plenty of other countries.

It's natural to blow off government failure with cynicism and lest you think I believe Democrats are immune from failure, scandal or graft when in power, believe me I'm not. I'm not excusing Democratic scandals nor excusing any future Democratic failures, but what the public should understand is that the ideals of the Democratic party revolve around a properly functioning government, while the ruling ideals of Republicans has been to govern in such a way as to increase the public's cynicism by wrecking the government.

This systematic destruction almost always gives ruling conservatives a new lease on life. More than a few others are starting to take notice as well: (below is a nice 6:00 minute video from Rachel Maddow's interview on the Colbert Report where she says letting the Bush administration govern is like hiring a vegan to be your butcher).

As a final thought, I'll leave you with a tidbit from an interview with Thomas Frank:

Conservatives have had a beef with the civil service for a really long time. This is part of their identity. I was able to find an article published in 1928, and it was written by—or maybe it was an interview with the president of the US Chamber of Commerce. A man who was a big player in the 1928 Coolidge administration (a big conservative powerhouse). The title of the article was— "The best public servant is the worst one."
What he meant by that was that you don't want good people in government. You don't want talented folks in government, because then government will work, it will be effective. And if government is effective, then people will start to expect it to solve their problems and who knows what comes after that. It’s all downhill from there, from his perspective. And the funny thing was—then you start researching the history of conservatism and conservative’s in power say things like this all the time; that we don’t want the best and the brightest in government.

Investment Bank. Dodo. What's the diff?

2008-09-18T11:29:00.010-04:00

It's the end of the financial world! A catastrophe of epic proportions the likes of which we never thought we'd see in our lifetimes... unless you count the IMF Crisis of '97. Or perhaps LTCM's collapse in '96. Or the 1987 stock market crash. Or the S&L Crisis of the '80s or the...

Okay so maybe you've seen other 'once-in-a-lifetime' crashes and we'll probably see another Wall Street crisis in the future, but I have to admit that, as the country wades into the second recession of the Bush Presidency, things over on The Street look particularly insane right now.

Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers, Merrill Lynch and AIG have all fallen and before it's over Morgan Stanley, Goldman Sachs and Washington Mutual will probably go with 'em (and take another, as-yet unknown AIG down too). Seems like a pretty big deal. I obviously gots lots to talk about. Buckle up and let's get started with the oldest stuff first:

The Fannie Mae and Freddie Mac (or Frannie) collapses played out exactly as I predicted. Shareholders of both companies feared a Fed takeover the minute takeover rumors began. Since a takeover would wipe out shareholders, investors bailed and knocked the stock price to zilch.

The two mortgage giants were suddenly cash strapped and neither company stood any chance of raising capital through equity issuance and no financial institution out there had the kind of cash on hand Frannie needed (not that they'd have loaned them the money if they did have it). This self-perpetuating downward spiral was inevitable once it started. But it's not a bad thing that this has happened.

Frannie was far from collapsing, like Bear and Lehman, yet the sheer size of the two institutions, as I've lamented before, needed to be scaled back. The larger a financial institution becomes, the greater the odds of a systemic collapse of the entire financial system if, or when, that huge institution fails. So Frannie's been taken over (at least for the short-term) by The Fed and will be downsized or chopped up or whatever (the process will take years, most likely). As I've said, this is a good thing. But events are shaking out in the private sector in a diametrically opposite way. Lehman collapsed but used a combination of bankruptcy and a buyer (Barclay's) for their separate divisions. Merrill Lynch has been acquired by Bank of America. Morgan Stanley and Goldman Sachs will probably merge with a traditional bank before the year's out. These are not good things. A troubled bank absorbed by a healthy bank only creates a bank twice as big but a bank that still has the same chance of failing.

To understand how we got here let me first examine the rise and fall of the current investment bank business model over the last 25 years.

In the early 1980s Salomon Brothers became the first investment bank to actively trade (and trade heavily) with their own in-house prop desk (basically an internal hedge fund). Until then the investment banks were mostly advice firms, set up to advise corporations on what would happen to their stock price if they issued more shares, bought another company or sold off a division. A publicly traded company wants to know how their stock price and financial position is going to be affected by their actions.

But once Salomon set up their prop desk, everything changed. The advice they gave to corporations got better and more accurate. The Merger & Aquisition advisers at Salomon suddenly had direct access to highly intelligent people who studied the markets minute-by-minute. The in-house traders had intimate, inside information about worldwide capital markets and how they worked and how they'd react. To tap into this information, all the M&A advisers had to do was walk over to the prop desk and talk with the traders (as a side note, this is what gave rise to insider trading scandals in the '80s and '90s -- in-house traders, trading on proprietary information could ply the market however they wished). With an active prop desk raking in profits, the i-bank itself could now also provide cash for deal financing.

A small, advisory investment bank cannot compete with one that trades because the smaller firm lacks the most accurate information about the capital markets. But to get that intimate understanding of the capital markets requires a lot of money -- usually more money than an M&A advising operation alone generates. In addition to the computers and floor space, the people needed to monitor the different worldwide markets are expensive. And the people who really know what the markets are going to do, and how they're going to react, are even more expensive. After all, these are not people who are likely to want to give M&A advice for a living.

The in-house prop desk was the only solution. And all the other i-banks either had to copy the model or disappear. Incidentally, the i-bank that's least likely to collapse, Goldman Sachs, was also the last one to create a prop desk (reluctant until 1992). Goldman's execs were always concerned about their client relationships and were hesitant to set up an in-house trading desk that might take positions against their cients (i.e. shorting a company that the M&A guys knew was distressed). But Goldman's nervous hand-wringing stopped once the desk opened and made obscene amounts of money.

The internal hedge funds all got up and running and by the mid-'90s and the i-banks had mulitple income streams (from the prop desk, the M&A services, etc.) and they started believing they had the strength and capital position of an actual bank. They started believing they had consumer or commercial deposits rather than completely leveraged positions. Which would eventually come back to bite them all... but we first have to understand why they started leveraging themselves to the hilt.

The initial, outrageous success of the prop desks came mostly because extremely intelligent people with proprietary information were trading on that information and recognizing opportunities and quickly jumping on them. I-bank traders knew the markets so well and had been steadily hiring a stream of freshly minted M.I.T. and Harvard grads that they were constantly recognizing big opportunities in small, previously unprofitable markets. The i-bank traders weren't making money trading the ho-hum stocks on the S&P 500. They were trading bonds. Until Salomon began trading bonds in the early '80s, nobody on Wall Street thought there was any profit to be made in bond trading.

But the i-bank traders were geniuses. They saw that bond's were priced two percent higher (or lower) than they should be and were able to bet that they'd fall into line. So the i-bank traders traded bond futures and credit spreads and international currencies; weird things that the rest of Wall Street didn't understand. But Salomon's guys were also making a killing, and their huge profits drew attention and the rest of the i-banks quickly joined the party.

By the mid-90's every one of them had prop desks up and running, staffed with MBAs from M.I.T., PhDs from Harvard, and Nobel-Prize winning academics. But what happens when every investment bank monitors obscure markets and each one has perfect mathematical models and perfect financial analysis? The opportunities disappear. Spreads tighten. The bonds that were mispriced fell back into line. When this happened the margins on trades shrunk and the previously opportunity-rich obscure markets began returning the same profits as the ho-hum index of the S&P. So what did the genius traders to? First they began heavily leveraging their positions... they started betting $500 million on half-percentage point moves to make the same $10 million they'd made before. That strategy caused the collapse of the first major hedge fun, LTCM in 1996. So what next? Well the i-bank traders began trying to create mispricing opportunities. And this is what gave rise to the popularity of the derivatives market.

Derivatives are financially engineered instruments that Wall Street brainiacs began using to try to outsmart the other Wall Street brainiacs. Derivatives were bundled up into such complex packages that counterparties and rating agencies didn't understand them. This led to mis-priced securities, it led to the re-widening of bond spreads, it caused interest rates to move in the wrong direction. And voila, all of sudden, new opportunities!

But once again, the guys working at the other i-banks were no slouches, so the derivatives continued spiraling upward in complexity to achieve their ultimate end. They eventually became so complex that even the CEO's and upper management of the i-banks themselves didn't know how they worked or what positions their trading desks were taking. And when an investment bank CEO, who's a Wall Street lifer, doesn't understand the derivatives trades his traders are making it's probably not something he should actively involve his firm in.

Perhaps the most recent notable example of this was when JPMorgan's analysts combed through Bear's books during the buyout negotiations. JPM's analysts couldn't decipher Bear's positions, that's how complex they were. The only thing the analysts really knew was that the underlying assets of the trades were junk (defaulted sub-prime mortgages). The analysts piled together as much information as they could and made a recommendation to JPM's execs for an $8 per share offer for Bear The Bear execs immediately fired back. The current CEO and former CEO both claimed that the analysts hadn't properly understood the trades. They said that only Bear's in-house traders were smart enough to understand the positions and that Bear's positions were incredibly valuable (obviously they weren't). If this doesn't scream that nobody understood the derivatives markets then I don't know what does.

Let me put their complexity into better context. Most of us are willing to admit that, on average, the top graduates from the top business schools, (Wharton and Harvard MBAs for example) are smarter than the average Joe. Probably a lot smarter. But by late 2005, every Billy SixPack in the country knew the housing bubble was bursting, and every Billy SixPack also knew that subprime mortgages would eventually start defaulting. Meanwhile, what were all the Ivy-League geniuses doing? Still trading mortgage-backed securities... almost three years later.

The fact that Wall Street's wizards were still trading worthless junk long after the housing bubble burst proves the geniuses had finally managed to outsmart not only each other, but themselves as well. Congrats guys. You wanna put those big brains toward something more useful now? Something that might benefit society at large?

Anyway, as this crisis deepens and Morgan Stanley and Goldman Sachs join the other i-banks on the scrap heap I think we're going to see a lot of criticism levied at derivatives and perhaps rightly so. In a letter to BerkshireHathaway's investors in 2003, Warren Buffett said, "derivatives are the financial weapons of mass destruction." Seems like a prescient statement by the Sage of Omaha, and he's certainly no dummy. Derivatives definitely helped get us into this mess but I don't necessarily think they're as evil as he claims and blame gets thrown everywhere (not necessarily wrongly) during a crisis. Derivatives are only evil, if they're used for evil ends.

They're useful tools for every business, not just Wall Street firms. With derivatives for instance, I can financially engineer any kind of situation for a company to smooth out its cash flows. If you're a CEO of a manufacturing company concerned that the prices of your raw materials are going to rise, or fall, or fluctuate wildly, or rise dramatically for three months and then flatten out or fall for two years or whatever... basically if you think you have any kind of idea on how your prices are going to move, then with derivatives I can engineer the situation so that your cash flows remain smooth. That's useful.

Credit Default Swaps are also invaluable. They help hedge risk. But it's when they're used to create profit rather than to simply hedge risk that they can become problematic. What derivatives really need (if they're not evil, like most critics claim) is better monitoring and oversight.

The ratings agencies have, thus far, escaped this whole mess with their reputations intact, but they should have done a better job of understanding the derivatives markets. Their mis-rating of mortgage backed securities is partly to blame for the situation we're in. Had they downgraded some of those securities in 2005, Wall Street might not be in the dire straits it's in.

And, looking back, how hard could it have possibly been for them to recognize that housing bubble had burst. Once home prices evened out and began falling, subprime borrowers (who were mostly loaned short-term ARMs) were bound to start defaulting. If they couldn't use rising equity in their houses to payoff their ballooning loans what happens? Default.

Somehow Wall Street and the rating agencies didn't see this coming when everbody else on the planet did. A more likely explanation than an inability to 'see' it coming is that none of the genius i-bankers cared enough to put in the hard work and actually look. Unwinding a derivative trade is time consuming and difficult but as the i-bankers raked in the money, I'm sure it also became a tiresome chore. Why bother to check whether the stuff being traded is actually worth anything, when everyone else is still trading it? It's gotta be worth something because the geniuses at the other four i-banks haven't stopped. So the collective arrogance of the highly intelligent overruled common sense and stopped them all from realizing they were all making colossal mistakes.

So the i-banks kept trading and the rating agencies shirked their responsibilities but, like an umpire trying to make up for a bad call, the ratings agencies apologized to the world by making sure they correctly rated AIG. The downgrade of AIG's credit led to the its government takeover and the sweep of fear throughout the market. Great job fellas.

Most of what I've talked about in this post has already been mentioned by the big media, but the one thing nobody's talking about (yet) is the end result of all this financial distress: the merger of i-banks into consumer banks. The Gramm-Leach-Bliley Act of '99 deregulated the industry and allowed investment banking operations, insurance, and consumer banking to all reside within one institution. Financial experts now seem seem to think that Merrill will be safe trading within the confines of Bank of America's insulated vaults. Or that Bear's trading desk will be safe within JPMorgan. But this is only more dangerous.

What happens five years from now when Merrill's traders lose a billion on some ridiculous trade? Will the Bank of America CEO bail them out? They're now people who work within his own company. He's friends with the traders, they drink together after work, his kids go to school with their kids. Will he use consumer deposit funds to bail out the trading desk's massive losses? Perhaps he won't. Perhaps he's cold-blooded enough to let the trading desk collapse. Perhaps he can be that surgical and simply cut off a limb. But fear and panic rule the markets and what happens when The Street gets word that Merrill is collapsing within BofA? The share price starts dropping, the depositors and shareholders start scrambling to get their money out and BofA falls into a downward spiral. Does any of this sound familiar? Does it sound like Fannie and Freddie? 'Cause it really oughta should.

So far, one-year into this credit crunch, we've seen three i-banks fall, but the average American hasn't been directly hurt. Sure, loan requirements are up, money's tighter, unemployment's spiked, the economy's screaming at breakneck speed into a recession, but imagine what would happen if Merrill collapsed Bank of America tomorrow? There's more than $700 million in deposits in there. Those are "average American" deposits.

I hear you saying that Fannie and Freddie had $5 Trillion in mortgages and we saved them. That's true. But the numbers that have been tossed about by the media thus far ($30 Billion for Bear / $200 Billion for Frannie / $85 Billion for AIG) are not real. Most of that money won't be used and will never really change hands. If $700 Billion in deposits at BofA go up in smoke however, the FDIC and The Fed will have to fork over that money to all the average Americans who lost their savings.

Newsflash. The FDIC and The Fed do not have that much money.

As it stands, financial experts are quite happy letting the banks consolidate into these new massive entitites we haven't seen since the Great Depression. Before the Gramm-Beach-Bliley Act of '99 repealed the 1933 consolidation laws, the i-banks would have simply withered and died. If this had happened in 1998 the i-banks would have collapsed and been seen no more. Their business model became a fundamentally flawed one, so why shouldn't they wither and die like every other flawed business model in the free market dies? Why do experts seem to think it's acceptable to let them merge into the confines of bigger, consumer banks?

Banks can't "consolidate away" risk. A chart might explain it better, but I can't make one. Just picture in your mind that a bank's size is sometimes capable of limiting its risk: if, for instance a bank is operating solely in Texas and wants to insulate itself from regional failures in the Texas economy it can grow and expand into other sections of the country. This growth helps spread risk, but there's a final limit -- a final end to the amount of risk that's ever capable of being "consolidated away". Whatever this nebulous, nearly impossible to determine top end is, that's ideal size of a bank. In any event, the current crisis has proven that size doesn't prevent collapse yet the private sector's answer to bank failures is to consolidate failed banks into healthy ones and grow even bigger.

The "too big to fail" label has thus far been given to finanicial institutions whose possible collapse threatens the very fabric of the worldwide banking system. LTCM was too big to fail. Bear was given the label. Fannie, Freddie and AIG too. Please make sure you welcome JPMorgan-Bear, Bank of AMerrill, Wachovia-Stanley and Goldman bank-to-be-named-later, to the party.