The Chinese Capitalist

Government Has A Role

2012-01-11T23:33:00.000-08:00

Yes government does have a role, but I think the bigger question is how we make government do what it is supposed to? How do we change an inefficient and incompetent government or a government that has been co-opted by corporations, unions, and special interests for their benefit? What is the mechanism to make government better?

Elections only replace the top level of government, it doesn't do anything to change the bureaucrats and lower level employees, what if they are incompetent and fail consistently to do their jobs? The SEC and their counterparts like the Commodities and Futures Commission (CFC) are good examples. We're told they were at MF Global overlooking the company weeks before they went bankrupt and stole over a billion in customer funds. How do we get these regulators to actually do their jobs? Unsurprisingly, no one has been fired from the regulators, how do we make them accountable? What is the incentive for these agencies to do better?

How do we determine if a government service is a good value? The TSA is a good example. How do we figure out if the benefits of their service outweigh the costs, both in dollar terms and time spent?

People are frustrated because we don't seem to be able to change government and make it better. With a private enterprise, we would just stop being customers and they would either have to shape up or go bankrupt solving the problem and another, better company would rise in its place. We have no such mechanism for government. Mark Thoma and others here make too many assumptions, especially about the efficiency of government and that government will operate as it's supposed to. What happens if it doesn't?

Health Care Needs Real Reform

2011-11-30T22:18:00.000-08:00

Look, the way health care works now is a fee for service process. That, along with malpractice lawsuits, creates a huge incentive for providers to give you as many services (such as tests, medication, etc.) as possible so that they can list them and charge for them. If there is the slightest reason for a service, it will be provided and charged. Patients do not understand medicine enough to refuse certain services that are probably unnecessary and since the insurance company pays, there's no incentive for patients to refuse all the services that are given to them even if they were educated enough to understand which is ridiculous.

What are the profits to insurance companies as a whole? From http://opinionator.blogs.nytimes.com/2011/11/03/less-than-26-billion-dont-bother/?ref=opinion

According to many on the left, health insurance companies are sleazy and unethical, making obscene profits by charging high prices to sick people, giving physicians and patients the runaround to avoid paying bills, and rescinding policies just when people who paid in good faith get cancer, while their executives often walk away with millions in compensation. Last year, health insurance companies did rack up big profits, but it turns out that the combined profits of the country’s five largest for-profit health insurance companies — United, WellPoint, Aetna, Humana and Cigna — were $11.7 billion, only 0.5 percent of total health care spending. Even confiscating every penny of those profits would add up to less than half of the cost-saving threshold. And even not-for-profit insurance companies need to have an operating margin — a profit by another name. There just isn’t enough money there to make a dent in health care spending.

It's not "greed" by insurance or phara or doctors, the problem is that there is no mechanism to restrict health care services on a cost/benefit level. This applies to doctors as well. A doctor never thinks about the cost of the care he recommends and if it provides enough benefit. That's just not the way they are taught, they are there to cure or fix your problem regardless of cost. That's why end-of-life care cost so much. A doctor will simply not say that it's not worth the hundreds of thousands to try and cure your disease when it's very likely, but not 100% certain, that you will die in 2 years anyway. That simply isn't done and so we have all these expensive treatments and surgeries and the patient dies in a year anyway.

People have to be made to accept that we need to do a cost/benefit analysis and start denying care if the costs aren't worth the projected benefits. Right now people are outraged when care is denied and it's understandable. People will want a treatment that extends life for an average of 6 months even if it costs $100,000 if the costs are paid by someone else. We need to move to a system where those treatments are denied unless the patient pays for the entire cost themselves. For those who want government control of the health care sector, that's exactly what will happen and what Britain already does. And you cannot sue the government in those countries if they deny you a service, such as a test, even if that test would have discovered the disease you eventually die of. That's what keeps costs down in those countries. We may have to move toward such a system if people cannot accept the cost/benefit method naturally.

Put it this way, NOTHING can prevent you from death. There is no cure, YOU WILL DIE EVENTUALLY. The goal is to get people to accept that it is not worth hundreds of thousands to try and extend your life by a couple of months on average when you are going to die anyway. This is a very harsh view and statement, but a practical one and one that needs to be adopted.

Michael Lewis and California's Budget Crisis

2011-11-01T02:12:00.000-07:00

The reason states are having so many budget problems stems from their pension obligations which are coming due as more and more workers retire. The so called "cuts" we all hear about don't apply to pensions and generally apply only to newer, younger government workers even as a growing portion of state and local budgets are being allocated to pension obligations. Michael Lewis wrote a piece on this regarding California in Vanity Fair which is below. I suggest everyone read the article as it shows clearly how government workers have used the system to enrich themselves.

http://www.vanityfair.com/business/features/2011/11/michael-lewis-201111

From 2002 to 2008, the states had piled up debts right alongside their citizens’: their level of indebtedness, as a group, had almost doubled, and state spending had grown by two-thirds. In that time they had also systematically underfunded their pension plans and other future liabilities by a total of nearly $1.5 trillion.

In 2010, for instance, the state spent $6 billion on fewer than 30,000 guards and other prison-system employees. A prison guard who started his career at the age of 45 could retire after five years with a pension that very nearly equaled his former salary. The head parole psychiatrist for the California prison system was the state’s highest-paid public employee; in 2010 he’d made $838,706. The same fiscal year that the state spent $6 billion on prisons, it had invested just $4.7 billion in its higher education—that is, 33 campuses with 670,000 students. Over the past 30 years the state’s share of the budget for the University of California has fallen from 30 percent to 11 percent, and it is about to fall a lot more. In 1980 a Cal student paid $776 a year in tuition; in 2011 he pays $13,218. Everywhere you turn, the long-term future of the state is being sacrificed.

Below, Lewis continues with an interview with the mayor of San Jose whose problems are a microcosm of what local governments are facing.

He hands me a chart. It shows that the city’s pension costs when he first became interested in the subject were projected to run $73 million a year. This year they would be $245 million: pension and health-care costs of retired workers now are more than half the budget. In three years’ time pension costs alone would come to $400 million, though “if you were to adjust for real life expectancy it is more like $650 million.” Legally obliged to meet these costs, the city can respond only by cutting elsewhere. As a result, San Jose, once run by 7,450 city workers, was now being run by 5,400 city workers. The city was back to staffing levels of 1988, when it had a quarter of a million fewer residents. The remaining workers had taken a 10 percent pay cut; yet even that was not enough to offset the increase in the city’s pension liability. The city had closed its libraries three days a week. It had cut back servicing its parks. It had refrained from opening a brand-new community center, built before the housing bust, because it couldn’t pay to staff the place. For the first time in history it had laid off police officers and firefighters.

By 2014, Reed had calculated, a city of a million people, the 10th-largest city in the United States, would be serviced by 1,600 public workers. “There is no way to run a city with that level of staffing,” he said. “You start to ask: What is a city? Why do we bother to live together? But that’s just the start.” The problem was going to grow worse until, as he put it, “you get to one.” A single employee to service the entire city, presumably with a focus on paying pensions. “I don’t know how far out you have to go until you get to one,” said Reed, “but it isn’t all that far.” At that point, if not before, the city would be nothing more than a vehicle to pay the retirement costs of its former workers. The only clear solution was if former city workers up and died, soon. But former city workers were, blessedly, living longer than ever.

A lot of people are confused over why they are seemingly having to pay more than ever in combined taxes, yet are getting less and less in terms of services. It's time to wake up, there are special interests that are clearly using government to enrich themselves and they are not limited to corporations or banks. We are on a course for disaster.

Lessons From Greece

2011-11-01T00:58:00.000-07:00

The lesson to be learned here is that once some point is reached, it becomes very difficult to reduce the debt/GDP ratio especially if the government's contribution to GDP is very high as it is with Greece. An economy dependent upon the government will experience a slowdown in growth or even negative growth until the economy can adjust which takes time. In the short term, things will not change and might become worse. The trick is to take pain and reduce government spending before the crisis point is reached.

In Greece, government spending makes up nearly 50% of GDP. What's interesting is that we hear about "austerity" measures, but no actual cuts in government employment have been made, only some changes to wages and pensions. That's because the Greek Constitution guarantees lifetime employment for public sector workers, they cannot be fired or laid off. Now there is talk about moving government workers into a "jobs banks" where they would be paid 60% of their salaries to do nothing. Link below.

http://news.yahoo.com/state-job-cuts-table-greek-loan-talks-123314850.html

Greece's economy is so screwed up and so dependent upon the government sector that there is simply no way to avoid massive pain and a huge depression.

Why don't they just default? In the long run this might be better, but a default would mean that they would have to make even bigger cuts in the short term. That's right, Greece is still running around a -7% deficit despite all the "austerity" measures and a default would force them to balance the books. The Greek economy needs to restructure itself away from the government sector, but it's too late now to avoid huge pain. With so many people dependent upon the government gravy train, it's no wonder that there is social unrest. Once again, the lesson is for us not to get to the point where we are Greece. Our debt/GDP ratio is at 100% now and fast approaching Greece's.

For the people and economists who decry these Greek "austerity" measures, I can only shake my head and wonder what world they are living in. GREECE HAS NO CHOICE, THERE IS NO MORE MONEY TO SPEND, INVESTORS REFUSE TO LEND GREECE MORE MONEY. Time for a reality check.

Flat Tax Plans and Growing Resentment on Both Sides

2011-10-27T16:23:00.000-07:00

The problem is that neither side is willing to move towards the necessary actions required to get to a balanced budget. This is especially true of the Left which will not cut spending in any meaningful way. Of the various flat tax plans, Cain's 9-9-9 plan is revenue neutral, Perry's is set to create stimulus. But the real problem isn't with revenues, like Europe, the problem is with expenditures which are so high that it's estimated income taxes would have to rise to above 65% to bring the budget into balance, that is assuming there will be no drop in economic activity which defies standard economic theory.

It's also interesting to note that every tax plan is rigorously attacked for the "costs" of the plan by the left, but spending on social programs and such are never treated the same.

The demand for lower taxes reflects growing frustration with the current system where a shrinking few are increasingly asked to shoulder the burden. With around 47% of wage earners paying no income taxes whatsoever, the rest are being asked to pay more and more.

Reasonable people would adopt a revenue neutral plan that gets rid of tax breaks for special interests, corporations and the like, but unfortunately, there is an unreasonable side that refuses to bring expenditures in line with revenues.

I will ask this unreasonable side how they propose to bring the budget into balance using tax increases alone. As stated, income taxes would have to rise to above 65% and I've seen higher estimates. Add to that State income taxes, property taxes, and SS/Medicare taxes and the tax burden approaches 100%. This again assumes that there will be no change in economic activity with a nearly 100% tax on income. Once again, I ask how this proposal can be called reasonable by any thinking individual. Instead of rhetoric about the rich, I simply ask for a proposal that includes reality. There are simply some Americans that refuse to deal with the problem at hand and use rhetoric to try and preserve a system that is clearly unsustainable. We need to make changes because we have to. Unfortunately, the first stage is admitting that there is a problem in the first place and too many are not even at that first step.

Loose Monetary Policy Fueled Bubbles

2011-10-25T17:36:00.000-07:00

Low interest rates, especially negative real interest rates create excessive risk taking because people are forced to reach for yield in order just to stay even with inflation. Look at the situation today and back in the early 2000's with the FED Funds set at 1%. The typical definition for the risk-free rate is the 90 day Treasury bill which closely follows the FED Funds rate. With inflation above 1%, anyone who wanted a safe return would have to guarantee themselves a loss. The only way to keep up with inflation and keep purchasing power is to make riskier investments.

Banks are not the only ones that benefit from low FED Funds rates. Corporate bonds and other financial instruments (such as mortgage bonds) are also affected and receive lower rates too. The higher the quality of the bond, the lower the spread between Treasuries and the bond. Today, highly rated and highly "safe" companies such as Microsoft are able to sell their five year bonds at below inflation. Once again, the investor has to reach for yield in order not to guarantee himself a loss.

Where to go? Humm, junk bonds offered around 7%, and back in the bubble, people couldn't get enough of those bonds. There was so much demand that artificial junk and subprime mortgage bonds were created. That's right, artificial bonds made from credit default swaps simulated the junk and subprime bonds because not enough real subprime and junk bonds were available. Do we see something here? There was so much demand for subprime "high" yielding debt that mortgage brokers were pulling in jobless people and giving them money to buy a home. That is people could get cash out in addition to owning the home!

There was no conspiracy, these loans were widely known and discussed because they were referred to as NINJA loans, no income, no job loans and that name itself should have been enough for any regulator or investor to understand what they were getting into.

Yes there is definitely a psychological side as well. People stopped pouring money into stocks after the tech crash and people are much more risk-adverse today, even willing to accept 0.01% on T-bills which is a guaranteed loss of more than 3% a year with inflation where it is. But I hope that you see how low interest rates create speculation because people are FORCED to take risks that they wouldn't otherwise to protect their savings and assets from being destroyed by inflation. Many people would have been happy getting 5% in a riskless T-bill, which is why the bubble popped right around the time the FED raised FED Funds to 5.25%. It's a complicated system with many feedback loops, but there is no question that loose monetary policy was at the center of the mess.

What You Don't Understand About the Debt Ceiling Debate

2011-07-30T00:54:00.000-07:00

What you don't understand is that spending is already at or near record levels. According to the White House, spending has more than doubled since 2000 and is due to increase yet again in 2011 to a record 3.8 trillion. If this isn't stimulus spending, I don't know what is. Yet I and many other common people, have absolutely no faith that this record spending is being spent wisely and will lead to future economic growth.

http://www.whitehouse.gov/omb/budget/Historicals

Year Receipts Total Outlays Deficit

2000 2,025,191 1,788,950 236,241
2001 1,991,082 1,862,846 128,236
2002 1,853,136 2,010,894 -157,758
2003 1,782,314 2,159,899 -377,585
2004 1,880,114 2,292,841 -412,727
2005 2,153,611 2,471,957 -318,346
2006 2,406,869 2,655,050 -248,181
2007 2,567,985 2,728,686 -160,701
2008 2,523,991 2,982,544 -458,553
2009 2,104,989 3,517,677 -1,412,688
2010 2,162,724 3,456,213 -1,293,489
2011 estimate 2,173,700 3,818,819 -1,645,119

The government sector is too large and needs to be restructured. People need to be shifted to jobs in the private sector, government needs to stop trying to be everything to everyone. The fact is that even with Boehner's plan, we would still have record levels of spending along with record projected deficits. That's why his plan is a huge compromise plan that is a win for Democrats already, asking for more is plain insulting. Look at the numbers and take $90 billion off of the outlays and off of the deficit. Does it even matter? Does it change the big picture? Be reasonable.

If these small cuts can't be enacted, what chance is there of real cuts in the future? No, people have been pushed against a wall and can't back up anymore. The fact that Boehner can't even get an agreement to freeze spending at 2011 levels shows how much he's backed down and enough is enough.

Government Today Incapable of Wise Spending

2011-06-12T00:16:00.000-07:00

Government today is simply incapable of good spending, that is spending on projects that will produce a positive net benefit in the future. Projects are approved and denied for political reasons, not economic reasons, here's a good example...

http://mjperry.blogspot.com/2011/06/federal-governments-solution-to-non.html

Megabus provides low-cost, non-stop express bus service twice daily between Iowa City and Chicago for fares as low as $10 each way for service on some days, and $18 and $23 on other days. The single and double decker luxury buses offer free wireless Internet, convenient power outlets for laptops and cell phones, and panoramic windows (see photo above), and the one-way trip takes less than four hours. To provide this affordable, convenient, dependable and low-cost daily bus service between Iowa City and Chicago, Megabus receives no taxpayer funding, federal or state subsidies, loan guarantees, support payments, etc.

So what's the federal government's response to the "non-problem" of affordable public transportation between Iowa City and Chicago? At New Geography, Wendell Cox writes:

"The federal government is again offering money it does not have to entice a state (Iowa) to spend money that it does not have on something it does not need. The state of Iowa is being asked to provide funds to match federal funding for a so-called "high speed rail" line from Chicago to Iowa City. The new rail line would simply duplicate service that is already available (Megabus).

Perhaps most surprisingly, the luxury buses make the trip faster than the so-called high speed rail line, at 3:50 hours. The trains would take more than an hour longer (5:00 hours). No one would be able to get to Chicago quicker than now. Only in America does anyone call a train that averages 45 miles per hour "high speed rail."

The state would be required to provide $20 million in subsidies to buy trains and then more to operate the trains, making up the substantial difference between costs and passenger fares. This is despite a fare much higher than the bus fare, likely to be at least $50 (based upon current fares for similar distances). By contrast, the luxury bus service charges a fare of $18.00 (or less, see above), and does not require a penny of taxpayer subsidy.

Here in Los Angeles, we have the worst subway system in the world yet it was the most costly to build per mile. I have used the Shanghai, Paris, Hong Kong, Beijing, New York, and Bay Area subway systems more than I have used the LA one even though I have lived in LA for more than 30 years. The system could be made better if it went to more areas. Right now, the entire West Side and beaches are uncovered. Instead of spending money on projects that would reduce traffic and increase living standards, we have ridiculous projects like the one above along with another "high speed" rail project that proposes to link LA with San Francisco at some point. Yet this project will begin by linking two communities I've never heard of in the Central Valley. This is only the tip of the iceberg though.

http://articles.latimes.com/2011/may/16/opinion/la-ed-bullettrain-20110516

The train's biggest problems can be laid at the feet of the High Speed Rail Authority, which is overseeing its construction. Inexperienced board members appointed by the governor and Legislature on the basis of political patronage rather than expertise have made a host of poor decisions. Not the least boneheaded of these is the board's plan to take a circuitous route from Los Angeles to Bakersfield by veering through Palmdale and Lancaster. Compared with the more direct route along Interstate 5 through the Grapevine, this would add 30 miles to the trip plus $1 billion in construction costs, and make it all but impossible for the train to meet its promised travel time of 2 hours and 40 minutes from L.A. to San Francisco.

Instead of these stupid projects that will produce ongoing legacy costs forever, a better idea might be just to give people money to spend in the form of debit cards. These projects not only do not produce a positive net future benefit, they produce a NEGATIVE benefit as they will be in the red and cost government resources to maintain for as long as they operate. These are only some of the reasons why more government spending is so opposed at this time.

Two Studies Prove Our Tax System Is Highly Progressive

2011-05-28T00:56:00.000-07:00

Misconceptions and Realities About Who Pays Taxes, by Chuck Marr and Brian Highsmith, CBPP: Executive Summary A recent finding by Congress’ Joint Committee on Taxation that 51 percent of households owed no federal income tax in 2009 [1] is being used to advance the argument that low- and moderate-income families do not pay sufficient taxes. Apart from the fact that most of those who make this argument also call for maintaining or increasing all of the tax cuts of recent years for people at the top of the income scale, the 51 percent figure, its significance, and its policy implications are widely misunderstood.

* The 51 percent figure is an anomaly that reflects the unique circumstances of 2009, when the recession greatly swelled the number of Americans with low incomes and when temporary tax cuts created by the 2009 Recovery Act — including the “Making Work Pay” tax credit and an exclusion from tax of the first $2,400 in unemployment benefits — were in effect. ... Both of these temporary tax measures have since expired. In a more typical year, 35 percent to 40 percent of households owe no federal income tax. In 2007, the figure was 37.9 percent. [2]
* The 51 percent figure covers only the federal income tax and ignores the substantial amounts of other federal taxes — especially the payroll tax — that many of these households pay. As a result, it greatly overstates the share of households that do not pay any federal taxes. Data from the Urban Institute-Brookings Tax Policy Center show only about 14 percent of households paid neither federal income tax nor payroll tax in 2009, despite the high unemployment and temporary tax cuts that marked that year.[3]
* This percentage would be even lower if federal excise taxes on gasoline and other items were taken into account.
* Most of the people who pay neither federal income tax nor payroll taxes are low-income people who are elderly, unable to work due to a serious disability, or students, most of whom subsequently become taxpayers. (In a year like 2009, this group also includes a significant number of people who have been unemployed the entire year and cannot find work.)
* Moreover, low-income households as a whole do, in fact, pay federal taxes. Congressional Budget Office data show that the poorest fifth of households as a group paid an average of 4 percent of their incomes in federal taxes in 2007 (the latest year for which these data are available), not an insignificant amount given how modest these households’ incomes are — the poorest fifth of households had average income of $18,400 in 2007. [4] The next-to-the bottom fifth — those with incomes between $20,500 and $34,300 in 2007 — paid an average of 10 percent of their incomes in federal taxes.
* Even these figures understate low-income households’ total tax burden, because these households also pay substantial state and local taxes. Data from the Institute on Taxation and Economic Policy show that the poorest fifth of households paid a stunning 12.3 percent of their incomes in state and local taxes in 2010.[5]
* When all federal, state, and local taxes are taken into account, the bottom fifth of households paid 16.3 percent of their incomes in taxes, on average, in 2010. The second-poorest fifth paid 20.7 percent. [6] ...

* The fact that most people who do not pay federal income tax in a given year do pay substantial amounts of other taxes, and also are net federal income taxpayers over time, belies the claim that households that don’t owe income tax will form bad policy judgments because they ostensibly “don’t have any skin in the game.”
* The federal tax system is progressive overall, but state and local tax systems are regressive and undo a significant share of that progressivity. There is nothing wrong with having one part of the overall tax system shield low- and moderate-income households, who pay substantial amounts of other taxes and who generally pay federal income tax as well in other years. ...

I think the above proves that the American tax system is highly progressive, dispelling the myth that the rich aren't paying their fair share. In fact, a recent study by the OCED found that the American tax system was the most progressive of all of the countries studied including those in Europe.

http://www.taxfoundation.org/blog/show/23856.html

But a new study on inequality by researchers at the Organization for Economic Cooperation and Development (OECD) in Paris reveals that when it comes to household taxes (income taxes and employee social security contributions) the U.S. "has the most progressive tax system and collects the largest share of taxes from the richest 10% of the population." As Column 1 in the table below shows, the U.S. tax system is far more progressive—meaning pro-poor—than similar systems in countries most Americans identify with high taxes, such as France and Sweden.

As noted, the discussion has been mainly focused on income taxes, not on other types of taxes. The reason is that proponents of tax increases want to raise INCOME taxes, and claim that the current income tax structure is not progressive enough. It is natural, therefore, for opponents of income tax increases to point out the facts as laid out by the Joint Committee on Taxation along with the OCED.

What is often overlooked when discussing income tax rates are the numerous other types of taxes that must be paid in addition to income taxes. With State and local taxes already taking 12.3% of income from the bottom fifth, rates for the other four fifths are no doubt higher meaning that those who are in the top tax bracket pay more than 50% of their income when all taxes (gasoline, utility, etc.) are accounted for.

The level of taxation for all citizens is shocking in this country and needs to be decreased, not increased. While the Bush tax cuts reduced taxation for ALL income tax payers, I suspect this has been more than offset by increases in state and local government taxes along with property taxes and the like. No wonder there is backlash on the state and local levels. Ultimately, we have to ask, are we getting good value for the taxes we pay? I think the answer is a clear NO.

Our New Economic Future

2011-05-27T01:14:00.000-07:00

We are in a global economy today and in a huge adjustment period which is causing weakness in the US economy. The addition of developing countries along with their billions of citizens to the global capitalist marketplace has created shifts in production based on comparative advantage. They are not yet rich enough to buy American goods in bulk, but will be though that will take a decade or more.

What America "manufactures" has also changed. We now create a lot of intellectual and information goods such as movies, drugs, and processes that have no physical basis. However the international legal protections and recognition of these new goods are still being formed and so we are not receiving the full benefit of our production.

We are moving into a world where tangible products are cheap and plentiful. However, humans will always need entertainment and information. Whether the manufacturers of those products will be compensated is the question, fortunately we seem to be moving in the right direction although enforcement is still very sparsely seen. If other countries would pay for all the software, movies, etc. that they use, the United States will be in good shape and those sectors could grow, but we need to do better at getting others to enforce and pay for what we produce, otherwise the US economy will be sunk as that is our future.

Reason Why Deficit Reduction Must Include Medicare

2011-05-27T00:39:00.000-07:00

The discretionary budget is much smaller than the non-discretionary entitlements part which includes Social Security, Medicare, and Medicaid. Of those three, Medicare and Medicaid spending are projected to grow the most. So in order to "fix" the budget and get us to where we can run sustainable deficits of approx. -4%GDP, I see no way out other than to tackle Medicare and Medicaid.

I support ending subsidies for corporations including the green subsidies that are so favored right now along with all farm subsidies, but that's just a drop in the bucket.

I also support reducing the defense budget and eliminating costly weapons projects that deal with an enemy we don't have and won't get into a war with, such as Russia and China. Both have nuclear weapons and a war would end in mutual destruction. Due to the proliferation of nukes amongst high tech nations, conventional weapons such as fighters, bombers, and so forth are unlikely to be ever used so there is no need for them. Cutting defense spending would be a help in reducing the deficit, but again, not enough.

At least Ryan made a proposal. It's time for Democrats and President Obama to likewise, make a serious proposal that would reduce the deficit to manageable means. Constantly bashing Ryan's proposal gets us no further towards a solution, there has to be an alternative for the discussion to move forward and we haven't seen it yet. And to cut off the usual cries of tax the rich, that won't be enough either if Obama sticks to his promise that no one making under $250,000 will see a tax increase.

Some Health Care Logic

2011-05-25T00:32:00.000-07:00

The problem is that SOMEONE has to pay for the cost of providing sick people health care. By logic alone, not everyone can pay less than the health care they consume, some people have to pay more in order for insurance to work. It doesn't matter if government runs it or if its single payer, the funds have to come from somewhere be it taxes or premiums.

Recently, Health and Human Services announced that, "The provision of the law that permits young adults under 26, long the largest uninsured demographic in the country, to remain on their parents’ health insurance program resulted in at least 600,000 newly insured Americans during the first quarter of 2011." Now how much more are these healthy young adults paying (or their parents) into the system? If insurance companies only increase premiums by the amount of expected costs to treat these healthy people, then it makes no difference. This is what I suspect has happened.

Right now, it seems that no one wants to pay more for health care, but that's an impossibility. For costs to drop for some people, others HAVE to pay more because the aggregate costs have to be accounted for. Either that or health care services need to be rationed (the death panel model) in order to reduce total costs. There is no way around it folks, it's time to face reality and choose from REALISTIC options, not ridiculous and totally impossible outcomes such as lower costs for everyone without any reduction in quality or quantity of care.

Greece Will Default

2011-05-23T23:25:00.000-07:00

The biggest problem with Greece is that they are not competitive within the Eurozone. Iceland did not suffer as much because they were able to devalue their currency, making themselves competitive again. Greece has the Euro, so their only option is to undergo a long and sustained deflation until their wages and productivity become in-line with the rest of the Eurozone.

According to http://www.uncwlibertarians.com/2010/06/greek-public-sector-employment.html

"Approximately one million people, or one out of four working Greeks, is employed by the state. More than 80% of public expenditure goes toward the wages, salaries and pensions of these public-sector workers."

These workers only work 37.5 hours a week and the average retirement age is 61. It's not only that these public sector workers are unproductive, they also received massive wage and benefit increases within the past decade as Greece was able to reduce its debt interest payments costs thanks to joining the Euro.

http://www.telegraph.co.uk/news/worldnews/europe/greece/7646320/Greece-why-did-its-economy-fall-so-hard.html

"Greece went on a spending spree, allowing public sector workers' wages to nearly double over the last decade, while it continued to fund one of the most generous pension systems in the world. Workers when they come to retire usually receive a pension equating to 92 per cent of their pre-retirement salary. As Greece has one of the fastest ageing populations in Europe, the bill to fund these pensions kept on mounting."

http://www.bbc.co.uk/news/10099143

"The government is planning a pay freeze for all public sector workers.

Some pay cuts will also be implemented, and public sector contract workers are set to lose their jobs.

This follows several years of continuous increases in pay, with salaries rising by an average of 30% since 2006.

Annual bonus payments - paid as 13th and 14th month salaries - will also be scrapped for high earners and capped for lower earners."

This crisis didn't just come out of left field, it arose due to years of overspending and pay increases for an already under-productive government workforce. A 100% increase in wages over a decade without a corresponding rise in productivity is a recipe for disaster. Austerity, meaning a cut to reasonable wages and benefits is definitely called for.

However it will take time for Greece to restructure its economy and time is what they don't have. They dug a hole so deep that it's just not possible for them to continue on with the debtload that they have. I believe that they will have to default (restructure in PC speak). Another round of loans from the EU will just delay the inevitable, Greece needs economic growth to reduce their debt/GDP ratio, but it takes time for laid-off public sector workers to transition into the private sector. At this point, austerity measures will only decrease GDP making things worse. Unless Greece can get a large enough EU bailout that will finance all their needs for the next decade, they will have to default.

More on Government

2011-03-24T21:06:00.001-07:00

Is the government not owning everything you've accumulated, not taking everything you've made, creating wealth? This is actually a philosophical question that Hayek and Von Mises have addressed far better than I can now. I suggest you go to http://mises.org/ for detailed arguments. My argument is that Jefferson and the Founders of this country said in the Declaration of Independence that we have certain inalienable rights, namely life, liberty, and the pursuit of happiness. Do you know that the pursuit of happiness refers to property rights? That's what he meant as far as I've learned.

What you are arguing is that because government allows you to keep what you've worked for, what you've earned--it is the same as government creating that wealth. If so, then Muammar Gaddafi owns Libya and neither we, nor its citizens, have a right to complain. We have to be grateful for whatever government allows us, because government owns and allows everything, we have no basic rights, nothing. Furthermore, since government owns and allows everything, it can take away our livelihoods, and that we should be grateful that we are allowed to even live, since government grants all powers.

The American system, a controversial system when created for sure, says different. All the powers of government come from the people and have to be given by the people to government. Government has no rights, has no powers, can't do anything without the consent of the people through Constitutional amendment. Property rights are a basic human right. So is freedom, so is liberty. Because government in the United States doesn't oppress me and take away what I've built, what I've created, what I've made, is not the same as government creating all those things!

The Public Sector Should Not Be Allowed To Unionize

2011-03-24T18:57:00.001-07:00

As I've said before, government is the ultimate power and that power can be used to enrich those who control government. Over the past decade, public sector unions have learned how to play that game. They make members pay dues which are then used to elect representatives that are favorable to the unions and will give them raises and benefits regardless if it is out-of-line with the private sector and regardless if it is a good value to taxpayers. So far, most of these representatives have been Democrats. When the benefits and wages become too much for the current budget to bear, taxpayers are told that taxes must increase.

I've always said that public sector employees must not be allowed to unionize. I have no problem with private sector unions, but public sector unions have disparate power that is unfair to those who pay for them, namely taxpayers.

First, unions can game the system by funding representatives that will do their bidding and keep on giving public sector unions ridiculous raises and benefits.

Secondly, unlike private sector CEOs or management, politicians are loath to rock the boat. They rather give generous and unsustainable rewards that will destroy the system in the future rather than take a stand, which could cost them their political jobs. Kick it down the road.

Finally, corporations which have given over-generous benefits and no longer offer a good value to customers can go out of business. I can decide not to buy a Ford or GM made car because it is just too expensive for the value it provides. I am forced to pay taxes.

Those are just some of the reasons why FDR, an union supporter, thought that unions should not be allowed in the public sector. Until Carter, and the 1980's with State governments, public sector employees were not allowed to unionize.

Oh, I forgot to add that I have options with the private sector. I can change banks, I can go to another fast food outlet, I can even decide to switch phone carriers if I think the prices, thanks to benefits given to union members, are out-of-line with the value I receive. I do not have the option with police, fire, and other government services, there is no alternative to government!

Wealth a Government Creation?

2011-03-24T18:39:00.000-07:00

Wealth is not created by government, otherwise command economies would be the richest on the planet rather than the opposite. People create wealth, and yes, government can prevent that. But to say that non-interference from government is the same as government creating wealth is like saying that freedom is a government given privilege rather than an inalienable human right.

The last time I checked, the top 10% of wage earners pay over 70% of income taxes, if that's not progressive, I don't know what is. Over 40% of tax filers do not pay a single dime in income taxes. The author needs to address these facts.

Government is the most powerful of all institutions. It can be used for good, but it can also be used to confiscate and enrich those in the government sector, namely bureaucrats and public sector unions. I can decide not to do business with an unfair and predatory corporation like Bank of America or even my cable company. I cannot decide not to pay taxes and forgo government, even if I think the services rendered are a ripoff for what I am paying. Bad corporations which do not provide a good value for the services they offer can go out of business, government will just raise taxes and make people pay for services offered at poor value without reform. Thus government is the ultimate organization we must be wary of. And as we watch events unfolding in the Middle East, we are reminded of what government can do--take your money, freedom, and even life--something no corporation has the power to do.

Clearinghouse for Derivatives = Good

2010-05-22T23:22:00.000-07:00

The reason why the big boys don't want a clearinghouse is because they are able to profit on information asymmetry. A good portion of profits on derivatives is made off of buying CDS, taking a cut, and then selling the CDS to someone else with a lower "premium" payout. So I sell a CDS to Bank A and receive $40,000 per year for every $10M insured. If I can purchase a CDS on the same company for under $40,000, I've just made money risk free. No not really risk free in reality, but it is to these guys. A clearinghouse would stop these transactions because everyone would know that the market price is $40,000.

The reason why there are so many CDS outstanding is because everyone plays the, pass it along and take a cut, game. I can purchase a CDS for $50,000 a year, then I write out a CDS for $60,000 a year, giving me a $10,000 a year profit that is hedged away for risk. My buyer can take my $60,000 CDS and sell his own for $65,000 a year, and get $5,000 in "risk-free" profits per year. And on and on this goes until you get a guy who wants to hold on to the CDS because he actually has the bonds to insure, or you find the biggest sucker who can't sell for a higher markup and is stuck with the CDS.

These type of profits provide no value and are born of inefficiencies that can be eliminated by way of a clearinghouse or exchange that posts the prices of the last trade

Financial Regulation and Credit Default Swaps

2010-05-22T23:20:00.000-07:00

CDS isn't involved in just insurance, it's used in CDOs to make synthetic bonds. If I write a CDS on GM bonds, I get paid the "premium" as long as GM doesn't default. If they do default, I must pay the contract amount and I receive the defaulted bonds in return (or I receive the liquidation value of the defaulted bonds back). I also have to put up collateral that pays the risk-free Treasury yield. Add it all together and you have something very much like a GM bond where I would receive interest payments as long as GM doesn't default and if they do, I lose my initial purchase (contract amount) minus whatever I can receive for the defaulted bonds (liquidation value).

The theory is to separate risk from investment. What if I just want to take on the risk of GM bonds without having to actually lend GM money, thus tying up my precious capital? With a traditional bond, I need to loan GM X money for a period of years and I will get X money back at the end assuming there is no default. What if I don't want to tie up that capital but still want to take on that risk? Well let someone else lend GM the money, I'll write a CDS on it and sell it to them. There, they just transferred the risk to me and I didn't have to lend GM any money (though I still have to put up collateral usually). Now that the other guy has a risk-free asset, he can then purchase more bonds up to the risk limit set by the risk management team. That's how it's supposed to work in theory. Of course, in reality his insured GM bond isn't risk free, if I go under, his insurance is worthless.

I think the problem lies with leverage and leverage ratios. CDS can help firms manage their risk without making big capital intensive moves. Selling GM bonds from your portfolio means that you have to find a buyer with the money, and then you're left with the problem of what to do with the money you just got. Where to put it? Why not just buy a CDS contract instead? That way, you get rid of the risk and don't have the problem of what to do with the excess cash.

When risk is being pawned off in an endless cycle, it can become hard to tell exactly how much systemic risk is left. I think I have sold my risk thanks to my CDS purchase, but so does the guy who sold me the CDS because he purchased another CDS to get rid of his risk. Risk keeps on getting transferred, we know that the total risk to the market as a whole cannot be eliminated or reduced merely by transferring, but each person thinks he's OK because he's sold his risk to some other guy who has sold his risk and on and on. It's hard to tell if the guy I purchased CDS from has too much CDS exposure (too overleveraged) because I don't know how many CDS he's sold or purchased since the time I originally purchased CDS from him.

Some limit has to be set for the amount of CDS exposure a firm has given his capital base. That amounts to a limit on leverage. A clearinghouse would make the market more transparent so I can see that there is way too many CDS out there for the CDS I just purchased to be considered safe. Right now there is no way for the individual actor to see the entire whole and the entire whole has a great impact on the individual actor. That is part of the problem. We need to think about the issues and come up with good solutions, I don't think banning CDS is even remotely close to the best solution.

Argument Against Modern Monetary Theory and the New Keynesians

2010-05-22T23:18:00.000-07:00

Can the FED can print all the money it wants to? Not without bad consequences, the ultimate being a Zimbabwe-like collapse of the monetary system.

What is missing from the discussion that of confidence. For the dollar to be an unit of account and store of value, society needs to have confidence that the numbers aren't being fudged, that whatever savings I've built up, my delayed consumption, isn't being manipulated.

Proponents of MMT and New Keynesian economics have pointed out that the government doesn't even need to issue bonds, it could just give itself dollars and spend up to the point where it can purchase 100% of the goods and services offered in the economy. Actually it can't, the monetary system would collapse well before the 100% and people would stop accepting dollars as money because they would have lost confidence in it as a fair and accurate unit of measurement. If even a dictatorship like Zimbabwe isn't able to compel its citizens to accept and use their worthless unit of account, I doubt the US Govt. would be able to.

The reason the government issues bonds at all (that is borrow) is to provide an open and transparent account and to assure the public that the dollar remains a good and fair measurement of the future consumption that they have saved. People want to know that, if they have saved $5 and that can purchase a sandwich at a fast food chain, they will wake up tomorrow and still have a sandwich "due to them" whenever they want it in the future. If they wake up and the $5 in their bank account can't buy them a sandwich anymore, then they know they've been had. Add expected inflation into the mix if you want a more accurate explanation.

When the government borrows money, the public knows that either future government spending will have to decrease, allowing the public to consume more (purchasing bonds is a way to delay consumption to the future), or the public will give up that future consumption in the form of higher taxes. Taxes are very visible and politicians are reluctant to raise taxes without implied consent from the public.

The FED printing money on the other hand, is a stealth tax that is not transparent and is not accounted for. At least with open market operations we can see how much the FED has printed, but as an independent agency that is not directly elected, the people have limited means to control the actions of the FED. No taxation without representation! That's a notion fundamental to our ethos. There are many reasons why FED printing of money and uncontrolled government money creation should be avoided.

Only under a communist dictatorship with an iron grip over society tighter than even Stalin was able to achieve, could government create money like the MMT/New Keynesians advocate. If I have $30000 in my bank account and the government all of a sudden types in $1,000,000,000,000 and posts it to their own account, I know all I've worked for my entire life amounts to nothing. Perhaps this gives a clue as to why people are so pissed off right now and are electing "extremists" like Rand Paul, who seem to understand better than the MMT folks.

Japan's Lost Decade, Glimpse of Our Future?

2010-05-22T23:00:00.000-07:00

Below is a post by Michael Gordon, "The Buggy Professor", taken from here. It's well worth reading so I've posted it below.

Why Comparisons between the US and Japanese economies --- the latter locked in stagnation for two decades --- Are Misleading and Wrongheaded.

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1) FIRST SOME DATA ABOUT JAPAN, COMPARATIVELY VIEWED: per capita income

All translated into $US at purchasing power parity for 2009, estimated (CIA World Factbook)

USA: …….$46,400
Ireland….$42,700
Swiss……..$41,700

Austria…..$39,400
Holland….$39,200
Aussies…..$38,800
Canada…..$38,400
Belgium….$36,400
Denmark…$36,000

Britain…….$35,200
Finland……$34,900
Germany…$34.100
Spain………$33,700
France……$32,800

Japan……$.32,600
EU-27 Aver,,,,,,,,,$32,600
Greece …..$32,200
Italy………$30,300

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2) WHAT HAPPENED TO THE JAPANESE MIRACLE?

As you can see from the per capita income comparisons, Japan --- once touted by statist admirers like Robert Reich (the salvation from the USA depended on our copying Japanese industrial policies) --- Japan has ended up at just about the level of Greece in 2009.

How did this happen? Consider by way of response the growth rates of GDP from 1960 until 2009.

……………...Growth Rate of GDP
1960-1969: 10%
1970-1979: 5%
1980-1989…..4%
1990-1999…..1.5%
2000-2009…..0.8%

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In effect, Japan’s fast growth rate in the 1960s and 1970s reflected standard neo-classical Solow growth theory, and especially convergence catch-up: the further behind a country is from the lead country or countries in productivity and per capita income when it is launched into sustained economic growth, the faster it will grow compared to the lead countries, only to slow down as it approaches the technological frontier.

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3) Japan’s Government Debt Servicing and Rollover Needs for Government bonds

The two sources for the data in this section need to be set out here: http://ftalphaville.ft.com/blog/2010/03/08/167701/japans-brewing-fiasco/
http://www.economist.com/business-finance/displaystory.cfm?story_id=15663864

• Government debt in Japan already absorbs 35% of government revenues . . . a result of constant fiscal stimuli that failed to kickstart sustained good growth since the early 1990s.
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• Gross Government Debt equaled 192% of GDP in 2009. That is the 2nd highest in the world behind Zimbabwe at 304% of GDP. By comparison, Italy’s gross public debt is 115% of GDP and Greece’s 108%.

…….Japanese official spokesmen, plus some financial institutions, argue that gross total government debt in Japan overstates the problem. The government, it’s said, has lots of assets it could sell like its railway system to private businesses. Maybe. It depends on the estimated value of those assets.
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• In 2010, $2.4 trillion dollars worth of government Yen-denominated bonds are scheduled to be roll over. This astonishing figure equals about 45% of total Japanese GDP!

The big question here?

Will Japanese businesses, financial institutions, and householders be willing to recycle their matured bonds, never mind buy new bonds? Household savings --- which were once about 16% of GDP in earlier decades --- have plunged to around 3.0% of GDP last year. What’s more, as the population ages swiftly --- the Japanese already the oldest people among rich industrial countries ---more and more Japanese households will stop saving and begin to dissave for their retirement.

Up to recently, Japanese investment groups and big businesses have bought the government’s bonds, despite extraordinarily low interest rates --- two year bonds, for instance, returning 0.15% interest. Right now, it’s not clear, but some international financial observers note that the largest government pension funds’ agency,

GPIF, in charge of government pensions, has acknowledged that it won’t be capable of rolling over maturing bonds to meet its pension commitments and is instead going to open credit lines. (GPIF’s portfolio happens to be larger than India’s total GDP)

Note finally here that Japan’s short-term debt-maturity is only 6 years compared to the UK’s average 14 years.
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• Will foreign investment groups buy Japanese bonds if Japanese households and businesses and investment groups can’t cover all the new or rolled-over bonds?

Possibly. Japan’s financial flexibility has noticeably improved in the last decade or so. Still, it’s hard to believe that foreign investors would be happy with the very low rate of return on government bonds that the Japanese themselves have accepted. Imagine what Greece’s official national debt would dwindle to as a problem the Greek government could borrow at 3.0% or lower long-term rates for their bonds.

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4) UNSOUND AND MISLEADING COMPARISONS.

All of which brings us to the soundness or not of comparing the US economy today with a slide into a Japan-like future. The comparison, to put it bluntly, seems extravagantly unsound. And for several reasons, to wit:

• Overall, Japan’s economic structures and policies are very different from ours. Which means very different business and financial institutions; and public-private sectors interaction (far more government regulations); and culture (which emphasizes stability); and swiftly aging population; and hostility to immigration and (less now than before) openness to market-oriented reforms.
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• On top of that, Japan’s growth model for decades --- back to the end of WWII --- has stressed export-led growth --- national consumption kept to levels since the 1960s to somewhere between 55-58% (as opposed to the US’s 65-73%). Only Germany has a similar record of restraining domestic consumption (for whatever reasons) among the rich big countries in the world.
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• And until last year, the Liberal Democratic Party --- which united big giant corporations, giant financial institutions (the banks owning the corporations’ equity in large part, and the corporations in turn owning the banks’ lion share of equity), small businesses, and farmers ---ruled as the majority party since the early 1950s except for a 9-month coalition at the start of the 1990s. In the process, political and bureaucratic ties to special interests --- not least to those that cling to the status-quo --- have piled up and fence in the room for maneuver open to policy reforms.
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• Except for impressive technological innovation in the past --- by means of importing American and West European technologies or building around their patents, then improving on their quality incrementally while reducing prices for the finished goods in Europe, the USA, Asia, and elsewhere --- the Japanese have not been creative innovators on their own. As a result, despite noteworthy manufacturing in autos and consumer electronics (and to an extent in some ICT products and optics), the Japanese economy hasn’t experienced any big breakthrough changes in its industrial structures since the 1970s. By contrast, a good 75% of the Fortune 500 Biggest Firms in the USA in the late 1990s hadn’t even existed 25-30 years earlier.
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• As for industrial targeting, the best studies showed that it might have speeded up Japanese economic growth in the 1960s and 1970s by a tad. After that, it was used to prop up the most backward domestic industries and shelter them from international competition.
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• Enter demographics. Japan’s 128 million population is aging rapidly, making its average the oldest among the rich industrial countries. Aging populations are, like aging individuals, less and less willing to undertake risky changes in their lives. At the same time, as people enter into retirement, they begin to dissave. In the upshot, the Japanese face a problem of financially supporting more and more retirees with fewer and fewer active workers. The US native-born population, by contrast, is just about at replacement levels in births, not to overlook the benefits of our openness to legal immigration.
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• Finally, for complex reasons, Japanese culture --- forced under pressure to open up to epochal changes by the intrusions of the US navy and other industrial countries after the 1850s and 1860s and modernize rapidly --- has emphasized stability and aversion to change for decades now . . . the whole massive assemblage around the status-quo well-nigh impregnable.

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5) WHAT EMERGES HERE?

Just all this that follows:

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(I.) A DUALISTIC ECONOMY in Japan

Japan’s economy emerged even in its fast-growth period before WWII and into the next three decades as a dual-system: a small number of giant cartel-like advanced firms like Toyota, Panasonic, Sony, and so on --- increasingly internationalized under pressure of globalization --- and a huge set of backward, low-productive industries that have been protected from change by a combination of political pork-barrel, politically inspired governmental policies, bureaucratic regulations and intrusions into the private sectors of the economy, and fears and worries about disruptive changes that have pervaded the outlook of average Japanese.

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(II.) THE OUTCOME?

Sooner or later, despite all the misleading hullabaloo about Japan’s miracle --- never mind that Japan (like Germany) had won the cold war by 1991 and was about to become the world’s dominant economic and financial superpower --- these anti-change, anti-free market aversions and rigidities were bound to slow down the country’s growth.

--- Since 1991, that landmark year, Japan has vied with Germany to rack up the worst growth-performance of any industrialized or post-industrialized country since the 1930s’ Great Depression. And unlike Germany, whose governments starting in the Socialist-Green era earlier in the last decade – and accelerated in the Merkel era --- carried out a series of major labor-market reforms along free-market lines, the German economy looks capable of sustained solid, if relatively low growth in the future . . . at any rate, once the global economy recovers and the eurozone’s crisis-laden problems are solved one way or another.

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(III.) THE CAUSES OF STAGNATION.

As for the problems of Japan’s failure to recover from its huge financial and economic crash of the early 1990s, it’s not because of what Krugman and a few others have claimed have been the basic causes ---- timid policymaking in fiscal and monetary policies, which to boot now hover over the US economy.

Instead of that, it’s erratic, politicized policymaking that, as one cause, further disrupted a rigid dualistic economy resistant to change once the earlier growth-path and growth-model of a large statist-guided market-system crashed all around them. It’s the combination of these interacting clusters of structural rigidities, politicized catering to public fears of change, bureaucratic pathologies, a small mountain of anti-market rigidities, and a status quo of a dualistic economy marked by low-productive industries for most of the economy that underlies Japan’s two-decade stagnation.

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Examples:

• Japan’s regulators didn’t seek to overhaul the banking system for a good 8 to 9 years into the crisis of the 1990s. That included more effective regulations as well as seeking with government assistance to make the banks liquid and solvent. In the US, these measures were taken almost immediately. And that includes, let us hope, new and effective regulations to prevent a financial meltdown in the future. Here, despite all the fretful worries about our political system, it has generally performed with unusual speed and flexibility since the fall of 2008.

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• The claim that Japan’s governments haven’t fought the stagnant economy and deflationary tendencies with aggressive fiscal policies is simply wrong. If that were the case, how did the Japanese public sector end up with national debt almost 200% of its GDP (vs., to take one well-known calculation, about 80% here, much of which is intra-governmental transfers between programs and agencies). What is accurate is the haphazard ways fiscal stimuli have been applied: large amounts for a while, then the spigot shut tight for fear of inflation or excessive governmental debt.

--- Even now, Japanese and foreign specialists haven’t reached a consensus on whether the fiscal policies helped or hurt the Japanese economy’s short- and mid-term revival.
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• Monetary policymaking has also been erratic. At times it supported the fiscal expansion. Most of the time, it proved timid and often worked against fiscal stimuli. At times too, it engaged in outright quantitative expansion (along Krugman-urged lines), with dubious results

As for monetary policymaking, the fears of change pervading the shared mentality of a rapidly aging population --- where the ratio of active workers to retirees living for decades is declining too --- would have stymied even more effective monetary expansion had it been implemented.

Traditionally, you see, like all the Asian Pacific countries, the Japanese have been big savers for a combination of cultural reasons reinforced by the kinds of export-oriented policymaking of intrusive state-led policies.

One of the curious results?

When interest rates are low, Japanese households – like those in China or South Korea --- don’t interpret those low rates the way Americans (and Europeans) do: as signs that asset prices in the bond and stock-markets or in owned residences have risen in value and start consuming more. Americans in such a context feel wealthier. Not so the Japanese and other Asians. They have, apparently, set ambitions to save such-and-such a percentage of their annual income no matter whether their incomes have risen or fallen under pressure of boom-times or recessions or, in the Japanese case, prolonged stagnation. And so they try to save more.

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• Note though the contrary trend in the last 12-15 years among households.

Incomes have stagnated for two decades now in Japan. In the early and mid-1990s, Japanese household savings remained fairly high as a percentage of GDP, only --- as the stagnation persisted and people entered retirement --- for the households that are rapidly aging to be forced to dissave. That did help to offset the culturally inherited tendencies of younger households to save, but not nearly enough to interact with fiscal and monetary expansionary policies to kick-start the Japanese economy into any sustained growth from domestic stimuli.

Instead, the only sustained growth --- about four to five years in the middle part of the last decade --- came from export-surges prodded by the huge expansion of the global economy. Domestic consumption remained low (55-57% of GDP), and the solid if mediocre growth (about 2.0% a year) ensued. When the global economy tanked into a financial and economic crisis in 2008 and 2009, the Japanese export-dependent economy tanked too.

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(iv.) THE MISLEADING COMPARISONS WITH THE USA?

 By now, hopefully, they’re self-evident.

As it happens, Cassandras abound in certain economic and journalistic circles in this country, among which doomster-warnings are those of Krugman who has been sounding them since the fall of 2008.

At times, he’s been a good soundboard for those in the Obama administration who were planning a fiscal stimulus anyway. At other times, his dire warnings seem to reflect excessive pessimism compounded, perhaps, by his pique at not being where Larry Summers happens to be.

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 The fact is, the US economy – the most flexible and innovative among the rich industrial countries --- has recovered faster from its financial and economic crash than Japan or any of the EU countries, the whole Continent there stagnating since the official end of the recession in August 2009. There has been virtually no growth in GDP anywhere in the EU. The eurozone crisis has further inhibited a recovery by creating huge uncertainty in the business and financial worlds (with some limited spillovers here in our stock markets)

By contrast, the US economy has grown not just more quickly but by a long-shot compared to Germany, Japan, and all other industrial countries except Australia and Canada . . . both countries admirably undertaking noticeable economic and financial reforms, with Canada’s recovery closely tied to the American recovery, what with 80% of its strong export-performance slated for our country.

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 As for the unusual high unemployment, it’s worth remembering here: job-creation is always a lagging indicator in the recovery from a recession. Even after the shallow recession of 2001 ended in the start of the fourth quarter, it took nearly two years before the rise in unemployment topped and then began to fall fairly quickly.

Is 10% unemployment a bad thing?

Sure, no two ways about it. But, for the Cassandras in this thread, note 10.5% or so was the normal level of unemployment in France from the mid-1980s until the boom period (with some labor market reforms) in the middle part of the last decade. In Germany, the unemployment rate since 1990’s unification was even higher until the boom and even more impressive reforms.

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 A flexible innovative economy requires continual sector-reallocation of capital, skilled workers, entrepreneurial innovation, and constant technological change and adjustments before it can absorb the changes and the new surges in productivity. What government can do is limited: for those workers displaced from jobs owing to trade competition, accelerate trade-adjustment assistance. For other unemployed workers, seek to encourage better information about job-growth in other communities or economic sectors, all the while giving tax breaks to firms that hire new workers beyond a certain percentage of their existing employee staff.

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Michael Gordon, AKA the buggy professor

Our Current Low Inflation Environment

2010-05-22T22:53:00.000-07:00

There is no inflation right now because people are deleveraging by cutting down their debt loads. Credit is still very very hard to get for the average person, I just applied for a mortgage and the fees alone are outrageous, but credit is limited and those who offer credit can charge whatever they want to. Most banks aren't interested in lending.

Americans understand that they can't spend like they used to, debt loads cannot continue to go up like they did before, the banks/credit lenders won't allow it and people don't want more debt anyway. So instead of spending and bidding up prices by demand, people are paying off debt as they can. We won't see inflation until the average American's balance sheet is repaired.

That means government fiscal policy will not be able to increase aggregate demand. As soon as government stops spending, demand will fall back to levels Americans find appropriate. However, should government continue to spend and spend, a new crisis will emerge pertaining to government debt loads. We'll be in the same position as Japan, the spending having accomplished nothing but with a huge debt weighing on our heads. Unlike what MMT proponents say, government cannot finance its debt and interest payments by itself, any attempt to do so will cause a collapse in confidence and bring about a crisis, much like the one we're witnessing in Europe.

The European crisis is one of the reasons for such low Treasury yields. Investors are pulling money out of Europe, selling their bonds, and investing in US Treasuries instead, causing a decline in yields. If there is one thing to be learned, it's that the financial landscape can change very very quickly once a tipping point is reached. Once confidence is lost and fear takes over, a stampede for the exits ensues. The collapse of the Euro from $1.50 to $1.23 was as quick as lightning. And it only took a matter of months for Greece to find out that their debt could only be sold at incredibly high interest rates, that is if it could be sold at all.

A similar tale awaits the US should it continue on with reckless spending, especially the useless pork barrel spending that the Congress is accustomed to. Once it becomes evident that the debt load is too large to finance, yields will rise very quickly and capital will flee the scene. Confidence once lost, is hard to regain. Draconian cuts to government spending will be demanded and government will have to surrender to the bond vigilantes and speculators as they have done in Greece, Spain, and even France.

We don't have to go down that road. And it bothers me that what money is being spent is not being spent well. At the very least spend money for productive projects that has some chance of paying off in the future, not on cars for clunkers or any of the crap that has so far been proposed. Tax breaks for corporations to buy equipment? No thanks. How about extending the Bush tax cuts permanently if you insist on continued stimulus? Allowing Americans to deleverage faster by taking less from them is the quickest way out of this crisis. The economy cannot heal until Americans are in better financial shape and are ready to spend again.

The Perpetual Mistake

2010-05-22T22:50:00.000-07:00

Here the perpetual mistake, assuming that wealth is constant and all that's to be decided is how to divide the pie. The poor in this country are considered upper middle class by the UN relative to the average person living today by PPP. Certain people create more wealth than others, that will never change, but the important thing is to create a system where "talented" people are able to maximize on their potential for wealth creation. Due to social effects and factors, the very fact that there is more wealth benefits all of society, which is why our poor are able to live better than most people on the planet. It's why our people as a whole and even our poor are better off living here than in Venezuela where the government actively tries to do what Roger preaches, that is take from the rich and give to the poor.

Globalization cannot be stopped, just as the age of railroads brought about changes, so will this era, we can't ever go back in time. With so many low-skilled workers entering the world economy at the same time, wages will have to equalize, there is just no way around it. Protectionism will be more harmful in the long run as it will make US companies dependent upon the protection for survival, look how hard it is for Chinese companies to gain a global foothold. Look how few companies in Russia are able to compete globally, it's hard to become a multinational though we take it for granted.

Besides, as other countries get richer, that wealth will benefit us as well. They'll be able to purchase more of our goods, more of our capital intensive products, as the total amount of wealth creation rises, everyone benefits though some more than others.

I don't understand the complaints of Roger, our standard of living continues to rise, including the poor and middle classes. People in this country have it easier today than at any other time, it was never easy to begin with, progress has always taken great effort and we've always had to work hard just to keep alive. Well, that's no longer the case now in this country, we can keep alive without working if we want and that's a big advancement from the past. Make a sardonic comment if you want, but there is no utopia on Earth and there never was.

It seems these complaints compare our society to some mystical perfect world where everyone can live like the rich of their time, but that's not possible. Rich and poor are relative terms, our poor live better than the elite lords and dukes of the middle ages, even better than the rich of a century ago, by what method do you arrive at your conclusions? What are you comparing to? The rich of our day? Some fantasy world? Both are impossible dreams, but I'll tell you what, the poor of the future will live better than the rich of today, that I am certain of. Your solutions are more harmful than good, it's time to step around the tree in front of you and see the forest.

A Message to Baby Boomers

2010-05-16T20:09:00.001-07:00

In my opinion, the Baby Boomers are the greediest, most entitled and selfish generation in the history of this country. Their parents were called the Greatest Generation, well the Boomers will go down in history as the Worst Generation. They are the ones in power right now and have been for a while. They are the ones that are constantly voting themselves more entitlements, more spending, more of everything. And they're the ones who've saved nothing, who've partied away all their income, who've spent recklessly and then feel entitled to services paid by someone else. They're the ones who established the entitlement mentality, that's there's no shame in taking government services, that's it's OK to be irresponsible but evil to be wealthy and frugal. You know, frugality used to be a virtue in this society, but now it's looked down upon, if you're not spending all of your income, you're cheap and a person to be despised.

The Boomers took for granted what their parents accomplished and gave them. That America is top dog and rich was earned, earned by blood, sweat, and tears from the horrors of the Great Depression to the beaches of Omaha and Iwo Jima. The Boomers never understood what it took to give them their suburban, dull, safe lifestyle. During their youth, they participated in the ridiculous hippie movement of the 1960's, yes these flower children are the same Wall Street bankers we see today, the same Madoffs, the same scam artists that forgot morality. The Boomers are the ones who proclaimed that there was no such thing as morality, no right or wrong, everything is relative, we can't judge, we can't say what is evil.

The Boomers are also the ones who lost Vietnam, who had no heart, who folded, whose despicable behavior on the battlefield and while in uniform disgraced the entire nation. The unprovoked massacres, the stories of cowardice, and then there were the riots and violence by youthful thugs running in the streets. As a member of Gen X, I'm glad we haven't behaved as disgracefully as our parents did. The troops in Iraq and Afghanistan and those who served in Gulf War I served honorably, moreover the protests at home were peaceful, not marred by rioting and thuggery.

The Boomers are the largest voting block and will be until they die. I fear the worst because they've proven themselves to be selfish, they'll make their children and grandchildren pay for their luxurious goods and services they receive from government. There is no shame, they see government as a tool to get what they want. All of a sudden, new "rights", new entitlements are being invented everyday. Damn everyone else, they'll live and die in comfort, to hell with the future and aftermath.

Let me say that you won't have the last word. You are in power now and can write lovingly about yourself and all the "accomplishments" you've achieved, but make no mistake, your children and grandchildren, who've you neglected to teach morality to, will judge you harshly. You are the worst, most selfish generation this nation has ever had. For all your parental neglect, I'm glad that Gen X and Y are unusually well behaved. Crime and violence, usually committed by those in their teens to 30's, is down. Divorce rates are down, teen pregnancy down. The senseless philosophy of the 1960s has been clearly rejected. I only pray that you don't leave such a large hole that we of Gen X and Y won't be able to get out. Already we have the disastrous health care bill that forces the youth to buy into insurance plans to subsidize the Boomers. Now Cap and Trade and Amnesty are coming up, it might already be too late.

A Lesson From Greece

2010-05-12T00:07:00.000-07:00

Over 50% of Greek GDP comes from the government sector. Tax raises have already been implemented, but higher taxes won't solve the deficit and debt problem. How much more, as a % of GDP, can higher taxes realistically generate? A couple of percentage points would be record breaking, Greece's deficit stands at around -12% GDP, clearly the problem is with spending.

Why are the bond vigilantes out in force? They've done the math and it doesn't work out. The austerity measures are not enough! Greece has dug itself such a big hole that the planned bailout just is not credible. That's why there is such a massive selloff, the current situation is unsustainable and will come to a head very fast. Here is some analysis on the math:

http://ftalphaville.ft.com/blog/2010/05/05/219811/grim-greek-austerity-arithmetic/

"Greece is attempting to adjust its primary balance by a magnitude that has seldom been achieved historically in western Europe.

While the details of the planned primary balance path under the EPP have not yet been published, we estimate the ratio is likely to be projected to be about 4-6% of GDP by 2014. In turn, this implies an improvement in the primary balance/GDP ratio of 13.5pp. Such an episode of fiscal tightening, if achieved, would constitute a near-record.

Yet such fiscal tightening would be different from other episodes because in the most of the other examples listed, nominal GDP expansion had been boosted by substantial declines in short-term interest rates, while in many cases the real trade weighted exchange rate had depreciated significantly as well. In all cases shown in Figure 7, nominal GDP grew strongly, which helped the deficit itself (via stronger receipts) as well as the denominator. However, it is hard for us to envisage that Greece will be able to generate much expansion in nominal GDP in the current circumstances, given that it is within the monetary union and is also faced with the need for significant competitive adjustment against Germany, which could prove deflationary."

What should we take from Greece's problems? That when doomsday comes, it will come quickly and be very nasty. There won't be many signs of ill health until the crisis hits, and when it hits, it might be too late to do anything. For those who advocate more entitlements and endless government spending in the US, be warned. No the US cannot default, but a stagflation would be just as devastating. We have to clean our own house before we become another Greece.

Paulson Deserves Praise

2010-05-12T00:01:00.000-07:00

Paulson should be commended for making the right moves to get us out of the crisis. Each time, he was ahead of the curve, he asked Congress for TARP before the crisis actually hit the entire financial system, but Congress took its sweet time debating for a week and then voted no. He asked for a lot of new powers, but did it in many increments because there was just no way Congress would consent to authorize all that he knew he would need, at once.

People criticize him for not rescuing Lehman, but don't take into consideration the political impossibility of bailing out both AIG and Lehman at the time. Only after things got worse and people saw the effects of the crisis were they willing to concede that Paulson needed all that power and money.

I say this with all honesty, it's really too bad that people always have conspiracy theories and look through a political filter. Paulson should be thanked for taking the personal abuse and for putting his ego aside and begging Pelosi on his knees, to authorize TARP because he knew that a failure to authorize would destroy the US financial system and cause another depression.

A less competent would not have come up with TARP and understood that he needed a "bazooka", though it was politically impossible to ask for several trillion all at once. A less competent person would have been frozen in fear and asked too little or waited for the crisis to force a move, rather than try and move ahead of the crisis.

For the critics, I ask what he should have done instead? Let's put impossible demands, like prevent the crisis, aside, since he's isn't God and he didn't arrive at Treasury until the bubble was already in full bloom.

Sometimes it saddens me to see so many people so unreasonable and with such a distorted view. If it's on an event that really doesn't matter, then I just shrug it off, but this was a genuine moment where we could have fallen off of a cliff into disaster. That this man is not getting any credit for saving us from another great depression is simply unfair. Was he perfect, no, but he was about as perfect as you can be without the benefit of hindsight and in a crisis without precedence. Give the man the recognition he deserves.

Guidelines for Supporting Government Run Services

2010-05-11T23:57:00.000-07:00

In my experience, government incompetence is much more common than effectiveness. But since I'm fallible, we should look back to history and around the world for a more complete view. Doing so should make it obvious that incompetence and corruption are the standard. A honest government that works efficiently is a rarity, most governments are very inefficient and very corrupt. It is natural for politicians to use government to further their own ends, as the saying goes, power corrupts, even Obama doesn't seem to be immune from shady deals and using power to reward those who've supported him. The favorable deals labor received with GM and the health care bill are just the most visible examples. It's been well known and standard operation to give certain government positions to favored cronies as a reward. Ambassador to the Bahamas or Micronesia to big fundraisers--that government is used to enrich and reward should come as no surprise. The bigger government becomes, the more that can be dished out as spoils, which is one of the principal reasons for a small and limited government.

I support government when it can be the most efficient method to do something. Government is horribly inefficient at providing national defense, the Boeing tanker contract that is STILL being debated is just one example of waste and corruption, still government, bad as it is, is still the most efficient way to provide national defense. Same with roads and police and fire.

It is not enough that government can do something well, it must also do it for a good price, that is offer a good value, better than the private sector. That's a big hurdle to climb and in most cases, government does not offer a better value compared to the private sector. Medicare administration costs do not count the cost of fraud which is substantial. Government provides more than 50% of the health care services and accounts for the majority of spending on health care in this country. As a result, government cannot be exempt from blame for the high health care costs of this country, rather it is a major contributor to the problem.

Speaking of problems, one of the biggest problems with regulation is the regulators. If only they would do their jobs! But as an internal SEC report revealed, often they are downloading porn when they should be regulating, incompetence is the norm, not the exception. People are right to be skeptical and cynical when it comes to government--it has failed so often and there are structural and systemic reasons for that. One of the biggest is that it's a monopoly provider so it lives on despite poor performance and outright failure. When the SEC fails to do provide regulation, it doesn't close or go out of business, it continues on, often with more money. Amtrack and the US Post Office continue to lose billions year after year, a business would have gone bankrupt and be forced to end operations. Fannie and Freddie announced large losses for the foreseeable future, without implicit and now explicit government involvement, they would never have gotten so large and out of control. Their regulator, failed to regulate them and protect the taxpayer.

I will support government involvement if it can be shown that government is the most efficient provider. That bar is rarely achieved. The only exception is if that would endanger our liberties. Even if a gulag style, concentration camp method of forced production were the most efficient, I would be against it.

I believe my standards for supporting government are reasonable, and logical. I hope that others here will be just as reasonable and logical in deciding when government is the best choice.

We're All Capitalists

2010-04-25T23:47:00.000-07:00

Jonah Goldberg's article for the AEI neatly summarizes the problems with socialism and why we're all capitalists at heart.

If by "capitalist" you mean someone who cares more about his own profit than yours; if you mean someone who cares more about providing for his family than providing for yours; if you mean someone who trusts that he is a better caretaker of his own interests and desires than a bureaucrat he's never met, often in a city he's never been to: then we are all capitalists. Because, by that standard, capitalism isn't some far-off theory about the allocation of capital; it is a commonsense description of what motivates pretty much all human beings everywhere.

And that was one of the reasons why the hard socialism of the Soviet Union failed, and it is why the soft socialism of Western Europe is so anemic. At the end of the day, it is entirely natural for humans to work the system--any system--for their own betterment, whatever kind of system that may be. That's why the black-market economy of the Soviet Union might have in fact been bigger than the official socialist economy. That is why devoted socialists worked the bureaucracy to get the best homes, get their kids into the best schools, and provide their families with the best food, clothes, and amenities they could. Just like people in capitalist countries.

It's why labor unions demanded exemptions and "carve-outs" from Obamacare for their own health-care plans. And why very rich liberals still try their best to minimize their taxes.

The problem with socialism is socialism, because there are no socialists. Socialism is a system based upon an assumption about human nature that simply isn't true. I can design a perfect canine community in which dogs never chase squirrels or groom their nether regions in an indelicate manner. But the moment I take that idea from the drawing board to the real world, I will discover that I cannot get dogs to behave against their nature--at least not without inflicting a terrible amount of punishment. Likewise, it's easy to design a society that rewards each according to his need instead of his ability. The hard part is getting the crooked timber of humanity to yield to your vision.

continue reading the rest of his great article here.

Ratings Agencies: The Monsters Congress Created

2010-04-21T19:31:00.000-07:00

It should also be noted that ratings are only important for regulatory reasons. Congress created the game, made these private agencies which are just companies issuing opinions on others, into God-like emperors who pronounce if some debt is worthy of inclusion in a pension fund or not.

Even more important is how AAA securities are treated under Basel and Basel II for capital requirements. AAA securities count 100% towards capital requirements while non-AAA securities start off at 50%. Again, Congress created their own boogeyman through bad regulations. It's important to get regulations right or else very unintended consequences can occur.

People should understand that no large investment or financial management company depends upon ratings to determine risk. Everyone from Fidelity to Paulson with his hedge fund has their own analysts and do their own research. No one except for maybe mom and pop (they probably aren't buying CDOs) use S&P, Moodys, or any agency to determine the risk level of default.

Then why are the agencies important? Because Congress made them so. They're part of the regulatory process thanks solely to Congress. And Congress has frozen out all other competitors, even those who have better track records, only a certain select few ratings agencies can issue ratings that "count" towards regulatory requirements.

Thanks to regulations, it was just too tempting for certain greedy institutions to hold AAA securities that count 100% towards capital requirements and pay a good yield over AAA US Treasuries. The very fact that CDO AAA always yielded more than AAA corporate bonds which in turn always yielded more than AAA US Treasuries shows that the market was aware that not all AAA were created equal. But since regulations treated them equally, we have a little discrepancy that ended up fueling (along with a bunch of other factors) the crisis. Now can people understand why regulations have to be very carefully crafted and the urge to just pass any regulation is probably very stupid?

Government Failure: Another Example

2010-04-21T04:35:00.000-07:00

Regulations will not work if the regulators refuse to do their jobs. With regards to the massive $8 billion dollar Robert Allen Stanford fraud, the SEC did just that. An internal report released on the same day the Goldman case was filed (of course), revealed that the SEC knew of the fraud as far back as 1997.

The OIG investigation found that the SEC’s Fort Worth office was aware since 1997 that Robert Allen Stanford was likely operating a Ponzi scheme, having come to that conclusion a mere two years after Stanford Group Company (“SGC”), Stanford’s investment adviser, registered with the SEC in 1995. We found that over the next 8 years, the SEC’s Fort Worth Examination group conducted four examinations of Stanford’s operations, finding in each examination that the CDs could not have been “legitimate,” and that it was “highly unlikely” that the returns Stanford claimed to generate could have been achieved with the purported conservative investment approach. Fort Worth examiners dutifully conducted examinations of Stanford in 1997, 1998, 2002 and 2004, concluding in each case that Stanford’s CDs were likely a Ponzi scheme or a similar fraudulent scheme. The only significant difference in the Examination group’s findings over the years was that the potential fraud grew exponentially, from $250 million to $1.5 billion.

While the Fort Worth Examination group made multiple efforts after each examination to convince the Fort Worth Enforcement program (“Enforcement”) to open and conduct an investigation of Stanford, no meaningful effort was made by Enforcement to investigate the potential fraud or to bring an action to attempt to stop it until late 2005. In 1998, Enforcement opened a brief inquiry, but then closed it after only 3 months, when Stanford failed to produce documents evidencing the fraud in response to a voluntary document request from the SEC. In 2002, no investigation was opened even after the examiners specifically identified multiple violations of securities laws by Stanford in an examination report. In 2003, after receiving three separate complaint letters about Stanford’s operations, Enforcement decided not to open an investigation or even an inquiry, and did not follow up to obtain more information about the complaints.

It is any wonder why I am so cynical over government control and fixes for our economy?

The Most Important Lesson of Economics

2010-04-21T04:25:00.000-07:00

INCENTIVES MATTER. Why after so many studies and so much evidence this critical factor continues to be ignored is something I can't explain.

There is no perfectly evil or perfectly good person who behaves in a wicked or saintly way regardless of the incentives and disincentives placed in front of them. "Good" people can be lured into doing "bad" acts through incentives. Outcomes can be altered due to mistaken incentives and the old nemesis of unintended consequences can make a well intentioned program into a very very harmful and bad one.

The intent really doesn't matter, what matters is that anytime an activity or outcome is subsidized, you incentivize it and anytime you tax an activity or outcome, you discourage it. At some point, there is danger that, in helping the poor or unemployed, the incentives become so large that behavior is changed and negative factors arise.

Now that's not saying we should end all unemployment or social payments. I just want everyone to take into consideration that INCENTIVES MATTER. I find that the Left's refusal to acknowledge this crucial factor is perhaps the largest reason why conservatives and liberals disagree on the proposed solution to age old problems. Thus the tax cut versus more social payments/subsides, etc.

Notice I'm not saying that giving a penny to the poor will make everyone in the US rush to spend their assets and become poor. The only thing I am saying is that the effects of incentives and disincentives should be considered by everyone. They are simply too important to be ignored, yet they often are as evidenced by the posts above, simply excused away instead of factored into calculations and conclusions.

More Thoughts on SEC vs. Goldman Sachs

2010-04-16T22:40:00.000-07:00

Didn't ACA, IKB, and everyone else have the same information on the RMBS in the CDO as Paulson did? That the great Paulson wanted to bet against this CDO was of supreme importance, why? Because he's an omniscient god?

Goldman acted as a broker/middle-man. It's not their responsibility to advise against trades that they don't think will work out well. Imagine if you entered a market buy order for Goldman stock on Monday and it was canceled because your broker thought that would be a stupid move. I'd be furious.

My take is that Paulson thought the subprime real estate market was going to hell and he needed a way to make a bet. So he asked Goldman to find a manager, ACA, that would structure something he could bet against. Paulson could have been wrong, he had no special information on the RMBS he picked along with ACA correct? He was just smarter and better than everyone else who had the same information. The information included credit scores, loan-to-value, etc., Paulson's opinion of the mortgages and of the real estate market isn't relevant. Is he God?

People are looking at this in retrospect with perfect hindsight. I ask you all to come up with a list of 10 stocks that you want included in some sort of "sure to lose money" index. The point is that Paulson had nothing to do with the low yields the buyers were willing to take or the low payments the CDS issuer was willing to accept for writing insurance. The more I understand the situation, the more I think this is totally BS!

SEC vs. Goldman II

2010-04-16T22:14:00.000-07:00

I was wrong and Goldman only acted as a middleman/broker in the transactions, they did not directly issue CDS and did not have positions in any of the transactions.

As I read more and more, it seems the SEC is really going to have a hard time proving anything. All Goldman did was find participants, they acted as a market-finder and had no skin in the game. Were they supposed to issue updates on what one of their customers, Paulson, was doing? Or basically say to the CDS issuer, "Hey, don't you know the great Paulson is on the other side of the trade? He's never wrong, and you're going to get taken!".

I think I understand the situation almost completely now. Paulson saw the crisis coming and wanted to bet against housing. But how? There isn't a subprime mortgage index or anything like that so he first had to create a reference index that he could bet against. That was the CDO made up of subprime loans rated Baa2 that he expected would be in trouble. So he asked Goldman to find someone who could act as an asset manager and structure such a CDO so that he could bet against it. Goldman did in ACA. ACA had all the information Paulson did on credit scores and so forth, and subsequent investors would also. After the CDO was structured, Paulson bought CDS on it and he turned out to be correct. Those issuing the CDS had the relevant information, that Paulson wanted to bet against this CDO all along wasn't relevant. It's like if I bought Goldman Sachs tomorrow and I didn't know George Soros was selling me his shares. So what? I'm buying because I see that the SEC has no case, who cares if Soros is selling?

If there is a culprit here, it is Paulson, not Goldman who only acted as broker. Still it is a stretch, Paulson didn't have any information that wasn't available to everyone else. He was just smarter and better.

Analysis of SEC's Case Against Goldman Sachs

2010-04-16T17:24:00.000-07:00

Those who want to read the actual complaint made by the SEC should go here. After reading the complaint, the SEC's case can be split into two parts.

PART 1

Goldman mislead ACA, the third party picked to head selection of securities, that Paulson, a person also involved in the selection of securities to be included, would have skin in the game of the final CDO.

On January 10, 2007, Tourre sent an email to ACA with the subject line, “Transaction Summary.” The text of Tourre’s email began, “we wanted to summarize ACA’s proposed role as ‘Portfolio Selection Agent’ for the transaction that would be sponsored by Paulson (the ‘Transaction Sponsor’).” The email continued in relevant part, “[s]tarting portfolio would be ideally what the Transaction Sponsor shared, but there is flexibility aroundthe names.”

then

47.
On January 10, 2007, Tourre emailed ACA a “Transaction Summary” that included a description of Paulson as the “Transaction Sponsor” and referenced a “Contemplated Capital Structure” with a “[0]% - [9]%: pre-committed first loss” as part of the Paulson deal structure. The description of this [0]% - [9]% tranche at the bottom of the capital structure was consistent with the description of an equity tranche and ACA reasonably believed it to be a reference to the equity tranche. In fact, GS&Co never intended to market to anyone a “[0]% - [9]%” first loss equity tranche in this transaction

Considering that what Goldman described was a CONTEMPLATED capital structure, I think this alleged deception will be very hard for the SEC to prove. It's up to ACA to do due diligence as they were hired to do just that, act as a neutral third party analyst for the selection of securities to be included in the CDO.

Later on, ACA's parent company would write insurance on the CDO. The SEC claims that ACA wouldn't have done so if they knew that Paulson had gone short (bet against the CDO since he helped pick the underlying securities. However I think that's a very weak argument as ACA also helped pick and had ultimate say in that they could have refused to put their name on a CDO they didn't like.

61.
ACA’s parent company, ACA Capital Holdings, Inc. (“ACA Capital”), provided financial guaranty insurance on a variety of structured finance products including RMBS CDOs, through its wholly-owned subsidiary, ACA Financial Guaranty Corporation. On or about May 31, 2007, ACA Capital sold protection or “wrapped” the $909 million super senior tranche of ABACUS 2007-AC1, meaning that it assumed the credit risk associated with that portion of the capital structure via a CDS in exchange for premium payments of approximately 50 basis points per year.
62.
ACA Capital was unaware of Paulson’s short position in the transaction. It is unlikely that ACA Capital would have written protection on the super senior tranche if it had known that Paulson, which played an influential role in selecting the reference portfolio, had taken a significant short position instead of a long equity stake in ABACUS 2007-AC1.
63.
The super senior transaction with ACA Capital was intermediated by ABN AMRO Bank N.V. (“ABN”), which was one of the largest banks in Europe during the relevant period. This meant that, through a series of CDS between ABN and Goldman and between ABN and ACA that netted ABN premium payments of approximately 17 basis points per year, ABN assumed the credit risk associated with the super senior portion of ABACUS 2007AC1’s capital structure in the event ACA Capital was unable to pay.

Part 2

Goldman did not disclose to investors that the selection process involved Paulson who had a short position against some of the underlying securities or similar securities.

41.
On or about April 26, 2007, GS&Co finalized a 178-page offering memorandum for ABACUS 2007-AC1. The cover page of the offering memorandum included a description of ACA as “Portfolio Selection Agent.” The Transaction Overview, Summary and Portfolio Selection Agent sections of the memorandum all represented that the reference portfolio of RMBS had been selected by ACA. This document contained no mention of Paulson, its economic interests in the transaction, or its role in selecting the reference portfolio.

I think this is the only place where the SEC might have a case. But did Goldman have to disclose Paulson's role? After all, Paulson is just another client of the firm and so does it have to keep track of what each and every client is doing? What if Paulson had entered into short positions with another firm instead of Goldman, clearly then Goldman would not have known (but he didn't). It was known that the underlying securities would be based on subprime mortgages rated Baa2, does Goldman have to reveal that Paulson, who played a part in the selection of the particular mortgages, had a negative view of the mortgage market and bet against those securities?

In the end, a stupid German commercial bank, IKB, decided to purchase $150 million of the CDO in two tranches. They lost just about all of the $150 million while Paulson, who had purchased credit default swaps on the underlying securities, profited. The CDS was purchased through Goldman, which means that Goldman "lost" money as they had to pay out on the CDS. That will add complications to the SEC case, but the SEC claims that the money IKB lost went to Paulson which isn't directly true. IKB lost money through purchasing a CDO offered by Goldman. Paulson made a bet on securities that the CDO was based upon or similar securities and collected his insurance money from Goldman. Goldman "won" with IKB and "lost" with Paulson, it doesn't follow that IKB's money went to Paulson. We'll have to see what happens, but this is by no means an open and shut case.

SEC Has Weak Case Against Goldman

2010-04-16T16:59:00.000-07:00

Today, the SEC filed civil charges against Goldman, a short summary from the NY Times reads,

Goldman Sachs, which emerged relatively unscathed from the financial crisis, was accused of securities fraud in a civil suit filed Friday by the Securities and Exchange Commission, which claims the bank created and sold a mortgage investment that was secretly devised to fail.

After reading more details of this transaction, I'm not sure if the SEC has a case or not. ACA knew that Paulson was involved with picking the securities, they exchanged e-mails with him and both negotiated over which securities would be included in the CDO.

On January 22, 2007, ACA sent an email to Tourre and others at GS&Co with the subject line, “Paulson Portfolio 1-22-10.xls.” The text of the email began, “Attached please find a worksheet with 86 sub-prime mortgage positions that we would recommend taking exposure to synthetically. Of the 123 names that were originally submitted to us for review, we have included only 55.”

It seems the whole SEC case hinges on the fact that Goldman did not disclose Paulson had purchased Credit Default Swaps (CDS) on some of the underlying securities from Goldman, and was involved with ACA in the initial selection process. However someone else on Felix Salmon's blog raised a really good issue,

“After participating in the selection of the reference portfolio, Paulson effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (“CDS”) with GS&Co to buy protection on specific layers of the ABACUS 2007-AC1 capital structure.”

In other words Paulson bought insurance for the underlying portfolio from Goldman.

If the underlying portfolio fails–or if it were to fail–Goldman will have to post collateral.

If Goldman knew that these are bad securities (implying that at some point it has to post collateral to Paulson & Co.) then why would GS structure them in a way that Paulson wants?

Even if for some strange reason GS did structure it the way Paulson wanted and got a fee in return, how can GS be held culpable, given the fact it is long on the underlying insurance?"

This will be a very hard case and is not a clear case of wrongdoing. Goldman was not an underwriter, they were just the broker in the deal. There's no guarantee that anything a broker sells has to be a "good" security in the eyes of the broker or the seller. It's like a yard sale, the buyer knows that the stuff there is junk in the eyes of the seller, but one man's junk is another's treasure. In the financial world, no one is omniscient, Paulson turned out to be right, but ACA had the opportunity to review the proposed list of securities, made revisions, and agreed to the final list. They could have rejected any of the securities on the list, and in fact did reject 21 out of the initial list as well as pick the replacement securities. It was a negotiation and ACA is a big boy who should have done better analysis (actually it's really the willingness of subsequent investors to accept risk for such a low yield). The fact that these were to be based on subprime mortgages at the Baa2 credit level underscores that this wasn't going to be as safe as a government bond.

This occurred on February 2, 2007: “Later the same day, ACA emailed Paulson, Tourre, and others at GS&Co a list of 82 RMBS on which Paulson and ACA concurred, plus a list of 21 “replacement” RMBS. ACA sought Paulson’s approval of the revised list, asking, “Let me know if these work for you at the Baa2 level.”

The only fault I can see is that Goldman didn't correct ACA's false assumptions that Paulson was long in the fund.

On January 10, 2007, Tourre emailed ACA a “Transaction Summary” that included a description of Paulson as the “Transaction Sponsor” and referenced a “Contemplated Capital Structure” with a “[0]% – [9]%: pre-committed first loss” as part of the Paulson deal structure. The description of this [0]% – [9]% tranche at the bottom of the capital structure was consistent with the description of an equity tranche and ACA reasonably believed it to be a reference to the equity tranche. In fact, GS&Co never intended to market to anyone a “[0]% – [9]%” first loss equity tranche in this transaction…

On February 12, 2007, ACA’s Commitments Committee approved the firm’s participation in ABACUS as portfolio selection agent. The written approval memorandum described Paulson’s role as follows: “the hedge fund equity investor wanted to invest in the 0- 9% tranche of a static mezzanine ABS CDO backed 100% by subprime residential mortgage securities.”

All the instant analysis on the mainstream news sites don't do justice to the complexity of the issue. It's a good thing there are blogs out there that will provide real analysis from people who understand the business, but that's bad for the SEC as the deeper you look into the case, the worse it appears for the SEC.

Difference Between Obamacare and Republican Proposals

2010-02-25T01:28:00.000-08:00

Mark Thoma is the owner of Economist's View, a blog that i frequent. He's gotten quite a bit of attention thanks to the success of the blog and now contributes to Marketwatch as a commentator. Recently, he wrote this article comparing Obama's revised health care proposal to Republican proposals. I wrote the following response on his blog:

After reading the article, I see a fundamental difference between Republican proposals and Democrat proposals that Mark Thoma seems to have missed. The proposals favored by Obama and the Dems focus mainly on expanding coverage and establishing a system that will pay for the subsidies that are included with the expansion. Whether a person favors such an expansion along with the taxes and fees that must go along to fund it, is a choice that has no objective right or wrong answer. In my judgment and the judgment of most Americans, this is not reform, certainly it's not the reform we wanted. It is perfectly reasonable to oppose a costly expansion of health benefits and the creation of another social spending program when we face huge liabilities with Medicare and Social Security in the future. If expansion is the "reform" Thoma mentions, then I and the majority of Americans oppose reform.

The Republican plans mostly concentrate on cost reduction. This is the kind of reform I and most Americans had in mind when the health care debate first started. We want more affordable health care, we don't want a new program that will expand coverage to the uninsured, most of which are uninsured by choice or have no legal residence.

The public option is the only proposal by Dems that meet the cost reduction requirement of "reform". I'm not against the public option, but it depends on the details. The public option should not be subsidized or receive government funding beyond what private insurers receive. That is it must operate from the premiums it collects, otherwise it would mix in the expansion of coverage which is opposed. It also must operate under the same rules as private insurers, this shouldn't be hard, Congress can just change the rules for private insurers too if they wish, but for the public option to be a true competitor, it must not receive special advantages.

As an economist, Mark Thoma should realize that a public option with the conditions proposed has very little chance of reducing costs. I'm surprised Mark Thoma dismisses rationing so easily, I think rationing is the best and most effective way to reduce costs. The thesis is that we're paying for health care procedures that either aren't needed (all the tests) or aren't a good value (like giving hip replacement surgery to a terminally ill cancer patient with 6 months on average to live). A medical panel or board is needed to investigate and determine which procedures and medicines offer the best value. Insurance companies will tend by allowed or required to deny care based on those recommendations, I don't any other way that would reduce costs by a major amount. Of course liability would have to be reformed too.

Bottom line is that the administration's definition of reform is something that Americans don't want, an expansion of coverage. It's very reasonable to oppose this kind of reform without obstruction as the main purpose. Simply those who do not believe an expansion of health care services, along with the higher taxes and fees needed to fund such an expansion, is wise or beneficial at this point should oppose reform. Obviously Thoma is not one of those people, but he should not ocnfuse rightful and reasonable opposition due to disagreement with obstruction based on politics.

Mass Media Can Flourish

2010-02-24T13:56:00.000-08:00

The mass media is alive and well, certain institutions will adapt, others will fail. The Wall Street Journal has increased its circulation. While the New York Times has decreased circulation, total subscription revenue is up thanks to price increases that have more than made up for the loss in subscribers. It seems the successful newspapers are moving away from the ad based revenue model to a subscription model where ads are secondary to the income generated from selling the paper itself. It sucks that the NYT and WSJ are now $2 at news stands in California, but it makes sense that they should charge a price people are willing to pay and that covers their operating costs.

Blogs are popular because they provide analysis of news. Reporting news is no longer as valuable as it was, people now want in-depth coverage and analysis beyond the usual of X did Y. Certain neglected news, local news, is still valuable and small newspapers have to focus on reporting stories that pertain to their local communities and are relevant. More investigative coverage is needed, we still want newspapers and organizations to dig up corruption and shady deals, or expose ridiculous waste. For example it was reported recently that it cost the new California agency that deals with pollution (forgot the name, the Air Quality board or something like that) $6000 to build each and every cubicle for their workers. $6000 is excessive for a single cubicle, the head of the board said the costs included telephone equipment and installation, but $6000 is still excessive for a phone, computer, chair, desk, and cubicle partitions.

In other words, certain organizations will continue to flourish. The Economist Magazine, for example, reported record levels of subscription, even as Time and Newsweek die off. Time had been increasingly dumbing down its coverage and spending too many pages on pop coverage of celebrities and so forth. I like the Economist because it reports on news all around the World, from Africa to Asia, every issue has stories from every populated continent allowing the reader to keep up with events around the world rather than just in the US. Newspapers and magazines should take note and follow along, US based media sources are too focused on domestic events and should be informing readers of what is going on in the rest of the world. It's a small world these days.

CO2 Emissions Missing Link to Global Warming

2010-02-17T22:06:00.000-08:00

We've continuously increased CO2 emissions without fail for the past 2 centuries, yet it has had no noticeable effect on the temperature measurements collected. We have not seen an acceleration in warming.

Here are the trends and significances for each period:
Period Length Trend
(Degrees C per decade) Significance
1860-1880 21 0.163 Yes
1910-1940 31 0.15 Yes
1975-1998 24 0.166 Yes
1975-2009 35 0.161 Yes

We've had a 150 year period now where CO2 emissions have risen exponentially from 1860 levels. Where is the similar exponential growth in higher temperatures? The fact that we can increase CO2 emissions from 2002 and yet show a drop in temperatures implies that CO2 emissions are not the primary driver of warming, perhaps not even a minor factor. Those who argue for a delayed effect must also answer why we haven't seen such an effect after 150 years. Shouldn't we have seen exponential rises in temperature by now that track CO2 emissions? Why haven't we? These are legitimate questions that need to be answered. More failed models that wrongly predict future temperatures are not what's needed. And consistent with the scientific method, models that have shown themselves to be seriously out-of-line with data time and time again are discredited and new models based on the same old ones receive little regard until they fit in line with data.

It is not the skeptics that are unscientific, it is those who put up these models that have proven themselves to be wrong time and time again. There should be zero weight given to these false models by anyone claiming to be unbiased and scientific, this is the standard approach used in every scientific field from biology to physics.

It is just not understandable how people can continue to claim CO2 is a primary driver when the 150 year data clearly shows otherwise. They have to first explain why they were wrong to be taken seriously, and that's just a first step. Otherwise, the theories that fit in with the data, namely that CO2 is a lagging indicator and is not a primary driver of warming, should be the mainstream established theory that all people and policy makers adhere to.

Avoid Volvo of Santa Monica

2010-02-17T21:56:00.000-08:00

My mom's story...

I feel very frustrated and sad due to the stupidity and shameful actions of Volvo of Santa Monica. While I was going home in the evening on December 23, 2008, my Volvo S80 engine started to emit a strange sound that I've never heard before. When I got home, the Volvo warning lights started to go off “Stop Engine” “No Oil”. When I saw this I immediately shut off my engine and the first thing next day, called AAA to tow my car to Volvo of Santa Monica, where I usually gofor repairs. They confirmed what the warning light said, the engine had completely run out of oil, and was in fact damaged and dead.

On October 04, 2008, I had just had maintenance done on my Volvo, and had only driven 3892miles since then. Feeling a bit frustrated at this, I asked one of the employees, Jesse, how could my car have already run out of oil? I told them that they must have made a mistake, and did not refill my engine oil enough, nor did they screw the gasket on well enough. At my home there is a palm sized black stain where I usually park. Jessie responded rudely and threatened to not bring my case to the Volvo factory if it included information on the oil leak. When I looked at the invoices, there was nothing about the oil leak. In fact I suspect that to cover up their mistake, they completely took apart the entire engine, on the grounds of “inspecting what went wrong”, no one can tell if they messed up on the engine now. I have a feeling they even took forged pictures for evidence in case I decided to go against them. The manager Ewald replied that my Volvo is 10 years old, therefore it eats 1 quarter of oil every 800 miles when it gets this old. I never heard of this weird assertion before, and neither has anyone else I talked to. But even if we do go by their logic of the engine eating one quart every 800 miles, it still means I should have been able to drive 5840 miles total without the engine running out of oil, while I only was able to drive 3892 with my engine running out of oil. So I still should have been able to drive 1948 miles, or 33% more even if we go by their calculations. They had to have not put in enough oil or screwed the plug on wrong so the oil leaked out and lied to cover up their mistake. My car is actually only 9 years old, and only about 116,000 miles on it. Before the Volvo S80, I had owned a Volvo 240 DL, which I drove for 14 years, and nothing like this ever occurred, which makes this incident of the engine running out of oil all of a sudden, ludicrous. It was the fault of the Volvo company, and whoever's at fault should pay for it.

I went to talk to Don Marino, the general manager of Volvo of Santa Monica to attempt to get reimbursed. This got me angry glares from Ewald whenever I saw him after, maybe because I didn't go through him first. Anyway, Don Marino made it seem like they were being the good guy, offering a “50% discount” for a final price of a $15000 new engine, however when I inquired about the engine price in another auto-shop, they stated that a new engine only costs $7000. 50% discount? More like a 50% mark up! Not did the Volvo of Santa Monica lie to cover up their mistake and not reimburse me, but they tried to scam me also!

I feel Volvo of Santa Monica didn't lie about the prices just once though. When I said I would just get an used engine because I did not have the funds to buy a new engine at the time, they offered to install it for an original price of $6100, along with a 25% discount to bring it to $4575. Now this seems like they were trying to be nice and reimburse me, but when I checked with other auto repair shops, their regular price without discount was $4500. I feel like they just said they would give me a 25% discount when there wasn't one in reality.

Eventually I bought a 65000 mile used engine, and the people who helped me install the engine was Viking Motors for a installation fee of $4500. After this, my Volvo has not had any engine problems at all.

Thereafter, I kept getting angry glares from Ewald, that his employee Jesse also noticed. I felt indignant, so I tried to continue to persuade Ewald to reimburse me. When they refused, I sued them. During the trial, Ewald blamed me for whatever happened to the Volvo, saying I don't take care of it, and hardly go for maintenance. I believe I take the utmost care of my Volvo that I possibly can—I usually don't even take it to work, only on my spare time, and take it for maintenance regularly, making their statement completely false. They also presented what I suspected were forged pictures of the engine mentioned before (which is actually the first time I saw them) and tried to explain them. They should have showed me these pictures when I asked for a explanation before, which is one of the reasons why I suspect they were forged. We lost the case, but the fact he had the audacity to try and blame everything on me is astounding.

I've driven a Volvo for 23 years in total, and 90% of the time I went back Volvo of Santa Monica to have my car serviced. However, I am astounded to find that they would lie to cover up their mistake and not reimburse me for it. I've given so much business to Volvo of Santa Monica, and the fact that Ewald would throw all those years of business and profits away, and even future profits to refuse to reimburse me even a mere $2500 for a new engine—in my opinion this is extremely stupid. A branch led by a manager like Ewald will hurt the entire company by driving its customers away. I hope that after reading my story, you will stay away from Volvo of Santa Monica.

Climategate's Phil Jones Says No Statistically Significant Global Warming Since 1995

2010-02-17T21:48:00.000-08:00

What Phil Jones, former director of CRU at East Anglia states should be noted carefully. For once he doesn't B.S. and so admits what we've known all along (from data) that there has been no statistically significant global warming for the last 15 years and that the Earth has cooled since 2002. Who's in denial? Global warming advocates who continue to pine for something that hasn't shown itself for 15 years. Again, where is the evidence for global warming? Instead of just saying it's there, why don't you listen to Phil Jones?

http://news.bbc.co.uk/2/hi/science/nature/8511670.stm

The BBC's environment analyst Roger Harrabin put questions to Professor Jones, including several gathered from climate sceptics. The questions were put to Professor Jones with the co-operation of UEA's press office.

A - Do you agree that according to the global temperature record used by the IPCC, the rates of global warming from 1860-1880, 1910-1940 and 1975-1998 were identical?

An initial point to make is that in the responses to these questions I've assumed that when you talk about the global temperature record, you mean the record that combines the estimates from land regions with those from the marine regions of the world. CRU produces the land component, with the Met Office Hadley Centre producing the marine component.

Temperature data for the period 1860-1880 are more uncertain, because of sparser coverage, than for later periods in the 20th Century. The 1860-1880 period is also only 21 years in length. As for the two periods 1910-40 and 1975-1998 the warming rates are not statistically significantly different (see numbers below).

I have also included the trend over the period 1975 to 2009, which has a very similar trend to the period 1975-1998.

So, in answer to the question, the warming rates for all 4 periods are similar and not statistically significantly different from each other.

Here are the trends and significances for each period:
Period Length Trend
(Degrees C per decade) Significance
1860-1880 21 0.163 Yes
1910-1940 31 0.15 Yes
1975-1998 24 0.166 Yes
1975-2009 35 0.161 Yes

B - Do you agree that from 1995 to the present there has been no statistically-significant global warming

Yes, but only just. I also calculated the trend for the period 1995 to 2009. This trend (0.12C per decade) is positive, but not significant at the 95% significance level. The positive trend is quite close to the significance level. Achieving statistical significance in scientific terms is much more likely for longer periods, and much less likely for shorter periods.

C - Do you agree that from January 2002 to the present there has been statistically significant global cooling?

No. This period is even shorter than 1995-2009. The trend this time is negative (-0.12C per decade), but this trend is not statistically significant.

N - When scientists say "the debate on climate change is over", what exactly do they mean - and what don't they mean?

It would be supposition on my behalf to know whether all scientists who say the debate is over are saying that for the same reason. I don't believe the vast majority of climate scientists think this. This is not my view. There is still much that needs to be undertaken to reduce uncertainties, not just for the future, but for the instrumental (and especially the palaeoclimatic) past as well.

Commentary on Deficit Debate

2010-02-12T01:33:00.000-08:00

The issue at hand isn't with the current budget and the huge deficits that may not be possible to cut in this time of crisis. It is with the continuation of these deficits for as far as the eye can see. Furthermore, the administration has attempted to enact additional programs that would be permanent and add to that already endless morass of large deficits. This is what people are concerned about.

There would be no issue if we ran -10%GDP deficits for 3 or so years, but the problems are structural and the current administration and congress refuse to acknowledge or deal with the long term problems that will impact us as soon as more Boomers begin to retire. No one wants to deal with tough issues and choices, but our leaders were elected for that purpose. The country has every right to be pissed, the buck has been passed for long enough, it can no longer be delayed for the next administration to handle.

We don't want to play the blame game. Fine past administrations and congresses put us in this place, but the current crop of officials were elected because we needed change. We needed people who would deal with the buildup of debt and crap and obligations. We didn't elect these officials just so they can whine and continue ignoring the problems of the country like past administrations. We expected real change, and change is difficult. These people who ran on change have failed to be different from the people we wanted to change. Enough excuses, it's time to deal with the situation at hand. Americans do not like whiners in our leadership, they expect decisive actions, not more finger pointing!

The F-22 vs. F-35 Debate And Government Waste

2010-02-12T00:54:00.000-08:00

The US has been carrying the cost of defense for both Europe and Japan, the F-35 JSF was developed in order for our allies to share in the costs of defense.

Unfortunately, the defense department is a part of the government and thus, subject to all the waste and stupidity common to government entities. The F-22/F-35 conflict highlights the problem with having multiple goals.

The F-22 is an air-superiority fighter designed to take out tough defenses. With the F-22, there is no need for the F-35 since legacy F-16 fighters would be able to fly in unopposed and above short range SAM systems.

But then our allies wouldn't be able to share in the costs! So F-35 production moves on, but the F-35 is not as good of an air superiority fighter. It can't overcome tough defenses, but it can perform multi-purpose bombing and other roles and is a replacement for the F-16. The main advantage of the F-35 is that it is cheap, or is supposed to be cheap. But with cost overruns, it might cost over $100 million each when it's all said and done, which means POOR VALUE. No surprise that our government cannot get good value for the money.

http://www.f-16.net/news_article3370.html

The F-22 was designed to break stiff enemy air defenses long into the future. F-22 systems have truly no peer in lethality. The F-22 uses extreme altitude, high speed, high quality stealth, and leading edge sensors to kill and survive on its own terms.

What the two USAF leaders don’t understand is that once the F-22 has cleared the huge threats which are enemy long range super surface to air missiles (SAMs) and enemy aircraft, common legacy aircraft can do the rest of the bombing and not get touched by the lesser threats. In other words, current legacy aircraft that are in production now, the F-15, F-16 and F-18 can drop cheap near all weather precision bombs from high altitude and not get touched by shorter range battlefield SAMs, shoulder fired SAMs, anti-aircraft artillery ( “triple A”) and trash fire. “I can touch you, but you can’t touch me”.

Based on this, the USAF has not justified a reason to acquire the F-35. The F-35 is not interchangeable with the F-22. The USAF claiming that it needs an expensive all stealth fighter force isn’t practical.

With its limited funds, the USAF can rebuild its fighter force to meet requirements of expeditionary war and home air defense. This can be done by funding the F-22 to a proper number of aircraft and buying new build F-16s which still contain a significant war fighting capability.

All these issues show why it's so hard for government to get its act together and why it so often wastes money buying stuff that is not a good value. Obama would be lauded as one of the greatest presidents ever if he could only make government get its money's worth when spending.

Bin Laden's Hip New Message: Global Warming, Same Old Goal

2010-01-29T16:54:00.000-08:00

Perhaps realizing that his calls for jihad and terror have limited appeal, Bin Laden is now targeting a broader audience through a new message emphasizing the dangers of global warming. Unsurprisingly, his solution remains the same, destroy the United States and other Western industrial countries who are responsible for the death of millions through climate change.

Boy this guy's got some serious political game; if your message isn't finding much acceptance, just rehash it to fit the popular trend of the day and all of a sudden you sound no different than Al Gore or the other celebrated global warming preachers. Hell, maybe he won't have to live in a cave anymore, he'll stay in luxury hotels instead, fly around in a private jet, and all the while still keep true to his original goal of destroying the West. The only question is when will he get his Nobel Peace Prize and funding from the UN? Al-Queda Against Global Warming: Death to America, could be the next big NGO, well done Bin Laden!

Osama bin Laden blamed the United States and other industrialised countries for causing global warming in an extraordinary message issued yesterday.
In a departure from his usual religious rants, the Al Qaeda leader lectured on the dangers of climate change, claiming the only solution was to 'bring the wheels of the American economy' to a halt.
Rather than vows to inflict death and destruction on the U.S. and its allies, the man behind the September 11 atrocity in New York discussed the environmental future of the planet and monetary policy.
'This is a message to the whole world about those who are causing climate change, whether deliberately or not, and what we should do about that,' he declared.
He blamed Western industrialised nations for hunger, causing flooding and the destruction of fertile ground across the globe.
And he warned solutions must be 'drastic' rather than 'partial'.
Although bin Laden has briefly referred to climate change and global warming in past messages, this fresh audiotape was his first dedicated to the topic.
The speech, which included almost no religious rhetoric, has been interpreted as an attempt by the terror leader to broaden the appeal of his message beyond Islamic militants.
'Talk about climate change is not an ideological luxury but a reality,' he said in the tape released to the Al Jazeera television network, adding: 'All of the industrialised countries, especially the big ones, bear responsibility.'
Bin Laden referred to the fact that while wealthy nations had agreed to the Kyoto Protocol that binds them to emissions targets, former U.S. President George Bush later rejected such limitations in deference to big business.
continue reading story

Make Piracy A Foreign Policy Issue

2010-01-27T16:18:00.000-08:00

Billions are lost every year due to piracy of our intellectual goods. These are the high value products that America manufactures and dominates in. Our music and movie industries are matched by none, yet piracy reduces our rightful rewards to a mere pittance. America is still the most innovative nation in the world, but what has changed is that we no longer are being rewarded fully for our innovative ideas that are being enjoyed around the world. As millions listen to our rap and pop artists, music record sales continue to drop. Software sales are stagnant even as more and more people use them. Our drug innovations are immediately stolen or forced to be sold at barely above manufacturing cost.

I'm astonished that this topic hasn't received very much attention though the effects are huge. Imagine if all the music, movies, software, drugs, etc. were paid for instead of stolen, the gains to the American economy would be huge and they would have a multiplier effect. Tower records would still be in business, employing tens of thousands of youth working their way through college. Software companies might actually hire programmers and release more software instead of declaring bankruptcy or praying for a white knight larger company to come along.

This should the the second most important foreign policy objective, taking a backseat only to terrorism. How China and others can steal our products with impunity while we beg them to extend us more credit so that we can legitimately purchase their goods is beyond me.

What's Wrong with California II: New York Times Magazine Weighs In

2010-01-18T04:03:00.000-08:00

Peggy Orenstein, a 21 year resident, reminisces about the way California used to be in this weekend's New York Times Magazine.

I didn’t move to California to become a “Californian.” I usually say that I came for a job; the truth is, I was young and in love and I followed a boy. That was 21 years ago, and much to my surprise, I’m still here. The relationship fizzled, but I was seduced by the romance of the state. I’d become a true believer in the California dream, right as it began to fall apart.

Skip to next paragraph

Source: Public Policy Institute of California, December 2009.

California has always been as much a state of mind as a state of the Union. Other places have sunshine. Other places have beaches. Other places even have decent organic produce, or so they say. But California promises something more: transformation. The state is the repository of America’s frontier spirit, the notion that a better life is possible for anyone who wants it, regardless of the circumstances of her birth. You can leave your past at the border and reinvent yourself here — whether as a film director, a high-tech entrepreneur, a Pilates instructor or simply a person who deserves a second chance (though, admittedly, the same mentality has been responsible for an overabundance of cults, serial killers and idiosyncratic drivers).
Nothing is more integral to that aura of possibility than the Golden State’s 1960 Master Plan for Higher Education, which guaranteed that residents could attend college virtually free. The top 12.5 percent of high-school graduates were funneled into the University of California system, which included the finest public institutions in the world. The top third were eligible for California State campuses. And for anyone who was “capable of profiting from the instruction offered,” the doors of community colleges were wide open. Free! Imagine the chutzpah, the pie-in-the-sky optimism of such a plan! Class and race would no longer be an obstacle to mobility: this state would be a model of diversity, fluidity — a true melting pot.
I’m now married to a beneficiary of that vision. My husband, Steven, a native Angeleno, is the son of a factory worker and a supermarket checkout clerk — Japanese-Americans who were interned during World War II and did not themselves attend college. Four years at a grand total of about $4,000 (including rent and ramen) changed his life: it didn’t ensure his success, but it provided the opportunity for it.
Flash-forward three decades. The state’s budget crisis led to cuts of $800 million from the U.C. system in 2009; $500 million from C.S.U.; and $700 million from community colleges. In December, the state regents increased U.C. student fees by 32 percent. That means, once you factor in books, room and board, that a year at Berkeley, the system’s flagship school, will top $30,000 next fall — hardly most people’s idea of gratis.

read the rest of the article here

I too, have benefited from the UC school system. The affordable tuition of around $5500 a year was one of the major reasons I choose to attend UCLA (that and I was winter wait-listed at Berkley). Community colleges were all but free, just a couple of dollars per unit. Back then, the high taxes we paid got us something--some of us might not have wanted what our taxes bought us, but at least it was something. Nowadays, I scratch my head and wonder what exactly we are paying for. Our taxes are higher than ever, but it seems we're getting less and less benefit in return. Ms. Orenstein doesn't point the finger at anyone (surprise, surprise) but I will. Government employees and their predatory unions have stolen the Californian Dream from all of us. Lest we do something soon, Ms. Orenstein's last words in her article will become reality.

The California dream is dead. Long live the California dream

Haitian Culture and Poverty: A Debate On How Culture Influences A Nation's Success Or Failure

2010-01-17T16:18:00.000-08:00

David Brooks wrote a controversial op-ed in the New York Times stating the importance of culture in a nation's success or failure.

Third, it is time to put the thorny issue of culture at the center of efforts to tackle global poverty. Why is Haiti so poor? Well, it has a history of oppression, slavery and colonialism. But so does Barbados, and Barbados is doing pretty well. Haiti has endured ruthless dictators, corruption and foreign invasions. But so has the Dominican Republic, and the D.R. is in much better shape. Haiti and the Dominican Republic share the same island and the same basic environment, yet the border between the two societies offers one of the starkest contrasts on earth — with trees and progress on one side, and deforestation and poverty and early death on the other.
As Lawrence E. Harrison explained in his book “The Central Liberal Truth,” Haiti, like most of the world’s poorest nations, suffers from a complex web of progress-resistant cultural influences. There is the influence of the voodoo religion, which spreads the message that life is capricious and planning futile. There are high levels of social mistrust. Responsibility is often not internalized. Child-rearing practices often involve neglect in the early years and harsh retribution when kids hit 9 or 10.
We’re all supposed to politely respect each other’s cultures. But some cultures are more progress-resistant than others, and a horrible tragedy was just exacerbated by one of them.
Fourth, it’s time to promote locally led paternalism. In this country, we first tried to tackle poverty by throwing money at it, just as we did abroad. Then we tried microcommunity efforts, just as we did abroad. But the programs that really work involve intrusive paternalism.

The op-ed led to the usual leftist hand-wringing and reluctance to "impose" culture on another society this time echoed by Chris Blattman.

His confidence makes me uncomfortable. To paraphrase, unkindly: These Haitians need to be more like hardworking, thrifty Americans. We’ve spent five decades learning that everything we thought would work in aid did not. Clearly it’s time to get tough. I read about some people who made this work in Harlem, so it’s obviously the answer for Haitians, whom through newspaper reading, I have deduced are also resistant to progress.

Don’t misunderstand me: Brooks could be right. In fact, I’m starting one randomized control trial to test the idea. I’m a little further from propounding it as God’s honest truth on the pages of the Times.

Sometimes the problem with big development solutions is they spring from hubris and certitude rather than caution and humility. There’s another approach to change, described in the previous post.

Finally, this topic was debated on Economist's View, a blog I frequently comment on. A college educator, Michael Gordon aka The Buggy Professor, wrote a detailed comment to which I responded after his post generated many negative responses by the leftist crowd found there. Please go here and scroll down to view the full post by The Buggy Professor as it is too long for me to quote, only half is offered below.

1) THE SUMMARY PROFESSOR CHRISTOPHER BLATTMAN OF DAVID BROOKS NY TIMES OP-ED IS UNFAIR TO BROOKS, especially since Blatttman ignores two key paragraphs that refer to a recent good book by a number of well-known developmental theorists: “What Works in Developoment: Thinking Big and Thinking Small” ed, Jessica Cohen (2008): Brookings Institute. Source, http://www.amazon.com/What-Works-Development-Thinking-Small/dp/0815702825

Specifically, with not just a reference to this impressive book, but also with an explicit quote from the most stimulating of the chapters --- the summary one by Abhijit Banerjee of MIT --- Brooks sides with the microeconomists who specialize in development theory as opposed to macroeconomic developmentalists who have been pushing one set of nostrums after another as the solution to economic backwardness, and for over 65 years now.

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2) CONSIDER, AGAINST THIS BACKGROUND, THE OMITTED TWO PARAGRAPHS IN THE BROOKS OP-ED

“In the recent anthology “What Works in Development?,” a group of economists try to sort out what we’ve learned. The picture is grim. There are no policy levers that consistently correlate to increased growth. There is nearly zero correlation between how a developing economy does one decade and how it does the next. There is no consistently proven way to reduce corruption. Even improving governing institutions doesn’t seem to produce the expected results.

“The chastened tone of these essays is captured by the economist Abhijit Banerjee: “It is not clear to us that the best way to get growth is to do growth policy of any form. Perhaps making growth happen is ultimately beyond our control.”

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3) THAT BROOKS ACCURATELY SUMMARIZES WHAT MICROECONOMISTS IN DEVELOPMENTAL THEORY HAVE BEEN INSISTING ABOUT BIG BIG QUESTIONS AND BIG BIG ANSWERS or Nostrums that macroeconomist theorists in developmentalism have been pushing for 65 years now --- one after another, each nostrum hailed as the key to rapid and sustained economic growth for economically backward countries, none of which have worked in most of Asia, the Middle East, Africa, or large parts of Latin America --- can be underscored by quoting the end of Professor Banerjee’s chapter (my paragraphing and capital letters).

“Which brings us to our last, most radical, thought: It is not clear to us that the best way to get growth is to do growth policy of any form. Perhaps making growth happen is ultimately beyond our control. Maybe all that happens is that something goes right for once (privatized agriculture raises incomes in rural China) and then that sparks growth somewhere else in economy, and so on.

“Perhaps, we will never learn where it will start or what will make it continue.

THE BEST WE CAN DO IN THAT WORLD IS TO HOLD THE FORT TILL THAT INITIAL SPARK ARRIVES: MAKE SURE THAT THERE IS NOT TOO MUCH HUMAN MISERY, MAINTAIN THE SOCIAL EQUILIBRIUM, TRY TO MAKE SURE THAT THERE IS ENOUGH HUMAN CAPITAL AROUND TO TAKE ADVANTAGE OF THE SPARK WHEN IT ARRIVES.

SOCIAL POLICY MAY BE THE BEST THING THAT WE CAN DO FOR GROWTH TO HAPPEN AND MICRO-EVIDENCE ON HOW TO DO IT WELL, MAY TURN OUT TO BE THE KEY TO GROWTH SUCCESS”

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4) WHAT EXACTLY HAS BROOKS THEN SAID ABOUT HAITI ‘S FAILED STATE AND ECONOMIC BACWARDNESS HAT ALMOST ANY DEVELOPMENTALIST TODAY --- including those in political science who specialize in political institutions, political conflict, civil war, corruption, crony patron-client networks, ethnic diversity etc --- Would Agree With:

(i.) Namely, it’s a dismal mess ---the poorest country and probably the worst governed in all of Latin America and the Caribbean.

And nothing by way of outside help --- foreign aid, American military intervention to help overthrow a dictatorship, and more recently limited UN intervention, 10,000 various micro-economic projects funded from abroad --- has improved the abysmal conditions in Haiti:

Its infrastructure is primitive still; its building codes are ignored; its hospital and medical services were abysmal before the recent devastating earthquake; poverty is rife; agricultural development has languished for generations; huge jerry-built shelters have been created around its two main cities, former peasants flocking by the millions there; and the huge gulf between the few rich and powerful on one side and the vast mass of Haitians on the other still looms despite all outside efforts.

Its population of slightly more than 9 million, moreover, suffers as the CIA World Factbook observes, from widespread infectious disease . . . not least owing to a lack of access to clean water, proper sewage removal systems, and basic healthy food.

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(ii.) As for its economic conditions, the best summary is found in the CIA World Factbook for 2010:

“Haiti is the poorest country in the Western Hemisphere with 80% of the population living under the poverty line and 54% in abject poverty.

“Two-thirds of all Haitians depend on the agricultural sector, mainly small-scale subsistence farming, and remain vulnerable to damage from frequent natural disasters, exacerbated by the country's widespread deforestation.

“While the economy has recovered in recent years, registering positive growth since 2005, four tropical storms in 2008 severely damaged the transportation infrastructure and agricultural sector.

---- [Buggy note: the Dominican Republic, which shakes the same island, climate, and geography with Haiti, suffered the same tropical storms, but weathered them far better --- not least to markedly superior infrastructure, fire-and-police systems, and healthcare systems. The economy quickly recovered from those storms, only to be hurt by the current global recession: As the CIA World Factbook observes,”T he Dominican Republic has enjoyed strong GDP growth since 2005 and continued to post sound gains through mid-2008 . . . “

Back to Haiti’s economy:

“US economic engagement under the Haitian Hemispheric Opportunity through Partnership Encouragement (HOPE) Act, passed in December 2006, has boosted apparel exports and investment by providing tariff-free access to the US. HOPE II, passed in October 2008, has further improved the export environment for the apparel sector by extending preferences to 2018; the apparel sector accounts for two-thirds of Haitian exports and nearly one-tenth of GDP.

“ Remittances are the primary source of foreign exchange, equaling nearly a quarter of GDP and more than twice the earnings from exports. Haiti suffers from high inflation, a lack of investment because of insecurity and limited infrastructure, and a severe trade deficit. In 2005, Haiti paid its arrears to the World Bank, paving the way for reengagement with the Bank. Haiti is expected to receive debt forgiveness for about $525 million of its debt through the Highly-Indebted Poor Country (HIPC) initiative by mid-2009.

“The government relies on formal international economic assistance for fiscal sustainability.”

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(iii.) CONSIDER BY CONTRAST HE DOMINICAN REPUBLIC RIGHT NEXT DOOR IN GREATER DETAIL

• With a tad more population than Haiti’s 9.2 million people --- and, to repeat, located on the same island and hence sharing the same natural conditions and history of colonialism, slavery, and dictatorship for most of its history until American military intervention in the early 1960s, followed by a corrupt rigged electoral democracy that then evolved since 1996 into a solid electoral democracy --- is far richer, far better governed, has far better infrastructure, and enjoys A PER CAPITA INCOME 7 TIMES HIGHER THAN HAITI’S

• Specifically, per capita income is $8200 in the Dominican Republic. In Haiti, it is $1300.

• As for poverty, 80% of Haiti’s population was estimated in 2003 (latest figures) to live below the poverty line. Next door in the Dominican Republic is half that: 42%.

• On top of this, even as the Dominican Republic’s more diversified economy continues to export large amounts of coffee, sugar, and tobacco --- not least owing to free-trade zones with the USA and others --- its largest foreign exchange comes now from its thriving service sectors, and especially tourism . . . now the largest employer in the country.

• Unemployment shows a similar huge gap: estimated to be 14.1% in the Dominican Republic, it happens to be . . . well, the CIA World Factbook admits it can’t estimate the level because 80% of the Haitian 9 million population has no formal jobs!

o Literacy is 87% in the Dominican Republic and 52% in HaITI

Another worthwhile lesson from the buggy professor, unfortunately you can't make people learn, thus ignorance is perpetuated.

With regards to the Dominican Republic and its greater wealth, I was wondering the same thing. Why does the Dominican Republic have better infrastructure and greater political and social stability despite similar histories than Haiti? The cultural and social factor can't be dismissed, try as those here might.

Almost every nation on the planet (I can't think of an exception) has faced foreign invaders and "interference". The United States was invaded in 1812 by the most powerful nation in the world. It's navy was no match for England's, allowing the English to land forces at will. Washington D.C., the capital, was captured, the White House burned to the ground. Using a leftist perspective, this should have led to utter collapse of U.S. progress, we should have been mired in poverty and even now be roaming masses of despondent poor due to this invasion and incidence of European imperialism (that Madison foolishly welcomed war can be dismissed, the internal actions of the invaded are irrelevant in leftist analysis or viewed simply as resisting colonialism) and our failure to this day can be blamed completely on this incident in the past. But we are not a nation of roaming despondent poor, neither is China which had to endure colonialism and several opium wars along with a prolonged occupation by Japan that only ended after WWII. Warfare in Europe during the Middle Ages to 1800's was constant. Two world wars devastated the continent, yet somehow the affected countries were more or less able to recover, especially Germany after WWI which suffered heavy foreign interference along with outright occupation by France after they missed debt repayments. Yet somehow Germany was able to establish itself as a dominant power in a mere 20 years after its defeat. Foreign interference is so common that it cannot be the single factor that determines success or failure. I won't even go into the occupations of Germany and Japan post WWII. Standard leftist analysis would state that Japan is still occupied to this day as U.S. forces have bases in Okinawa against the wishes of the local populace, Japan should be even worse off than Haiti since its constitution was largely written by American imperialists.

The view that institutions and culture, each which influence the other, are the largest factors in a nation's success or failure is gaining support even amongst the left. Obama seems to understand, but as the buggy professor notes, actual policy is much more difficult to enact.

We can try to set up institutions and change culture through education, but the populace have to be willing to adopt and embrace the changes. Otherwise the effort will fail and will result in resentment along with more leftist accusations of colonialism. Yes any help we offer today, should it not succeed is immediately viewed as imperialism. Furthermore there is danger that our educational efforts, even the small scale educational programs the buggy professor recommended above, will be rendered ineffective by destructive leftist accusations of propaganda and brainwashing. An effective surefire policy method still has not yet been found that can guarantee success in light of the many difficulties, the leftist-Marxist influence amongst the worst and most destructive. So we struggle on, I suppose if it were easy, every nation would be prosperous. Good thing President Clinton's involvement shelters our help somewhat from leftist attacks. That is the real value of having a Clinton and Obama, as members of the left, they are more resistant to false leftist accusations.

Anti-Americanism Hampers Our Efforts to Help Haiti

2010-01-16T23:42:00.000-08:00

Because of Soviet style anti-Americanism, it is very hard to do anything today that does not lead some brainwashed fool to view the act as a form of imperialism, and then blame the U.S. for whatever subsequent negative events that occur in that country, no matter how much time has elapsed or the actual impact of the initial U.S. engagement. Thus all the bad can be blamed on the United States and our need to conquer. Strangely though, should we do the opposite and avoid any sort of engagement, then we are guilty of isolating the country and that act is also used to explain all the negatives that the country experiences subsequently. Basically, to these people, the United States will always be at fault no matter what. It is hard not to have had some contact with another country in the 230+ years of our existence, and these people have a gift for spinning whatever engagement in a negative light. Give aid and it's called propping up a government. Don't and it's harm by neglect. The real harm of this tactic is that by viewing every act as harmful, it hides the actions where the United States really did do wrong and prevents a logical, straightforward discussion and analysis of our bad deeds.

So if we try and help Haiti, even with just advice, that act would be seen as propaganda and an attempt to brainwash the Haitians, no doubt so that we can exploit their natural resources later. Any trade thereafter would be viewed as exploitation, and whichever company engaged in trading would be the evil benefactor, the reason that we started the brainwashing/propaganda program in the first place.

Still I feel that we must do what we can to help, even if we will be blasted for it later and blamed for any future setbacks the Haitian people might face. It's our duty to help our neighbors, and we've seldom backed away due to hardship in the past. Clinton did the right thing by restoring order and democratic rule in Haiti, we must not let cowardice deter us today.

Where Was the Inflation? Right In Front of Your Nose!

2010-01-15T02:35:00.000-08:00

I think we need to seriously reconsider the basket of goods used to measure inflation. Intermediate and manufactured goods are becoming cheaper thanks to emerging countries like China and Vietnam. We are in an era of greater manufacturing productivity being passed on in the form of lower costs for manufactured items. So we will not see inflation in this era as long as we measure inflation primarily through manufactured goods.

Commodity, energy, and asset prices, on the other hand, don't benefit from lower cost manufacturing. If the Fed is using inflation as an indicator of whether monetary policy is too tight or too loose, they must understand that the manufactured item category will give them a lower inflation rate than normal thus fooling them into thinking monetary policy is tighter than it is. The Fed should look at inflation ex manufactured items or at least adjust for the China effect that skews the inflation numbers. They are treating current CPI numbers as if they were the same as CPI in the 1980's or 1990's, but the era has changed.

I believe this is why the Fed has adopted a monetary policy far far too loose, because they are being tricked by a natural deflation in manufactured goods due to the entry of China and other emerging markets. If they adjust for these factors, they would see that inflation was out of control in the 2000's, but unfortunately, they did the opposite. Instead of paying attention to food, energy, and asset price inflation and ignoring manufactured goods, they used the CPI ex food and energy as their main measure of inflation. How stupid! Furthermore, a change in the housing component of CPI to owner equivalent rent removed housing asset prices from CPI and replaced it with a non-asset alternative. No wonder they haven't been able to pick up inflation, they've removed everything that can rise in price from the CPI!

Now if someone like me can see this, why are Fed members still scratching their heads over the lack of inflation? It should be obvious by now, and I'm going to give Bernanke the benefit of doubt when he says that he will be alert to inflation and raise rates quicker than the Fed did in the past. So the real key is how commodity, energy, and asset prices behave. Oil and gold are already at elevated levels, the stock market has recovered. Should we see food prices skyrocket as they did during the bubble and oil go back to 100, we will know that inflation is back and out of control again. But should the Fed continue to be clueless and look at CPI ex food and energy, then they will never see the signs of loose credit and they'll never get why their policies are causing bubble after bubble.

Fundamental Causes of the Financial Crisis

2010-01-04T00:42:00.000-08:00

As I've learned recently, capital requirements (as in Tier I capital, etc.) are the only limit to lending by banks. But the use of SIVs and off balance sheet subsidiaries allowed banks to escape the capital requirements imposed on them. Even without the SIVs, a "well-capitalized" bank only needs a tier 1 ratio of around 8%!

The capital requirement for Fannie, and other GSEs were even lower at around 3%. Back in 2002-4 when Fannie had an accounting scandal, Congress had a chance to reform and limit the outrageous size of the GSEs, but of course this was defeated. Meanwhile Bush pushed for lower down payment requirements and government subsidies to make housing "affordable for all".

The crisis is almost totally due to bad loans, or loans that are underwater. Had the standard 20% down payment been in place, it would have been hard for the majority of the populace to engage in the bubble. Bubbles can only happen when the mainstream populace participates. The 20% equity would have also cushioned the banks from the majority of losses in my opinion as the peak would have been lower to begin with.

Interestingly enough, we're not the only ones with a housing induced crisis. Australia and Spain are only some of the many other nations that similarly experienced a housing bubble. This leads me to the belief that there is a systematic problem within the global financial network. The problem is that bank lending is not constrained adequately. Furthermore, the low interest rate environment does NOT translate into commodity or consumer good inflation thanks to what the modern financial system has developed into, which is a credit based system.

In this new system, firms or agents first identify an investment opportunity (it can be to build a factory or buy an income producing asset that will generate a greater return than the cost of the loan). Banks then lend to the firm or agent. Notice that the identification of the investment opportunity is step number one, not the lending. With a low interest rate environment, the hurdle to clear for a profitable investment is much lower. Borrowers then borrow to acquire assets. I believe this is why we saw asset and commodity inflation but no inflation in goods and services tracked by the CPI. Firms and agents aren't borrowing to consume, they are borrowing to acquire income assets or building a factory (or store) that produces consumer goods and services to sell at a profit. The new production that comes online keeps prices for consumer goods and services down, but the means of production get bid up. The lower the interest rate, the lower the threshold yield needed for a firm or agent to borrow to acquire or build.

I don't think people understand this new system of finance. This is why people are constantly looking for inflation (as measured by CPI) but finding none except in asset prices (which aren't included in CPI) and can't see the connection between the FED's loose monetary policy and the various bubbles (all asset bubbles) that have popped up. In sum, I identify lax leverage limits and the low interest rate environment established by the various central banks as the underlying causes of the crisis.

RNC Questionnaire Mailed to Me

2009-12-31T17:11:00.000-08:00

I received this survey from the RNC recently asking me to fill it out so that they can get more evidence to set strategy and show Republican Congressmembers that Obama's policies aren't popular. Humm, the survey seems very biased to me, the questions are loaded--what kind of proof will this survey provide?

And lo and behold, after the questionnaire ends, there is a contribution form for you to send money. This is the first mailing I've ever received from the RNC or any political party. The cynic in me thinks the survey was just to fire people up over controversial topics and remind them of what is going on in Washington today. When they finish, the contribution form is right there so that they can "do something". What do you think?

2009 Year End Real Estate Charts

2009-12-30T16:25:00.001-08:00

Here are some useful charts as we end the year.

Los Angeles Real Estate Prices Based on Traffic Flow

2009-12-30T15:36:00.000-08:00

As we end 2009, it seems the worst for residential real estate is over. During this year, I picked up three properties in the Oakland area and all of them seem to have gone up looking at recent sales data. With properties generating huge cash flows even with a worsening rental market, I doubt that we'll see a new low being made in Oakland. As for the rest of the nation? Who knows. In LA where I live, I see single family homes continuing to trend lower in price, the homes in various non-Westside areas like Riverside, La Puente, Silverlake and so forth need to return to their pre-bubble prices of around $250,000-$450,000 depending on their proximity to Downtown LA.

In LA, it's all about traffic. Traffic is horrible going west in the mornings and east in the afternoons, north and south are horrible all day long. Downtown is the center of the freeway system where all traffic merges into a few lanes ill suited to today's traffic flow. Downtown is also where a lot of high paying jobs are, generally the easier traffic is to and from Downtown, the more valuable the real estate will be. Those who bought homes 30-60 miles away East of Downtown have 2 hour drives each way at least, to and from work. These are the homes that have more to fall, no one wants to spend 4 hours a day in the car, and with prices getting cheaper elsewhere, hitting the magic price point of $400,000-$600,000, the starter home price in LA, real estate in Riverside will have to return to $200,000 to attract takers. Because north/south traffic is especially bad, homes that are oriented on the 5/101/110/405 interstates that seem closer to Downtown than homes to the east oriented on the 10/60 will be just as cheap. That is moving 5 miles north or south is like moving 10 miles east valuewise. The further east and north/south, the lower property values. Homes located west of Downtown are able to escape the bad traffic flow and so reflect that convenience in their prices. West Los Angeles where I live saw prices drop by only 5.5% in 2009 according to Zillow, and the average home is still at a very high $798,900 (Oct 2009 sales).

My general thoughts are that LA has more to fall. It's a rich city, but having to spend $800,000 just to live in a decent area without facing horrendous traffic to and from work is just too much. Surprisingly, it will be these areas that hold up the best as everyone considers traffic congestion to be one of the major factors when deciding where to purchase. Consider this article as a very general overview of the LA market, I was thinking about more specific predictions and so forth but that's a lot harder and more time consuming than I thought it would be. This was supposed to be just a quick 5 minute blurb, but it's been well over 45 minutes now as I have to check facts and so forth. Maybe the lesson from this post is that real estate is very location specific and generalizations are all but useless. No wonder my real estate instructor drilled into us that location, location, location are the three most important factors in real estate. Now that I have 7 properties in LA and Oakland, I fully understand why.

Uncertainty Principle of Economics

2009-12-28T23:47:00.000-08:00

With so many people asking why economics isn't able to predict one crisis or another, I've come up with an answer.

Just as physics has its uncertainty principle that forbids absolute knowledge over a particle's position and velocity (momentum to be more correct), perhaps economics should have its own uncertainty principle that it's impossible to predict both direction of a market and the timeframe with certainty. You can predict timeframe exactly, but then have no idea of which way a market will move. You can predict that a market is overvalued and will move down with increasing accuracy, but then cannot pinpoint the timeframe at all.

Such an uncertainty principle of economics would end the questioning of why the latest bubble or market movement wasn't predicted. It's just not possible, if it were, then we won't have a bubble or movement in the first place (think what would happen if we knew housing would drop AND the exact second when the drop would occur). Remember, you heard it here first, I expect a share of the Nobel Prize should someone follow through with the calculations and a formal proposition.

Google's Internet Monopoly

2009-12-28T23:21:00.000-08:00

A recent op-ed raises concerns over Google's near monopoly position, read on for my response.

http://www.nytimes.com/2009/12/28/opinion/28raff.html?_r=1

AS we become increasingly dependent on the Internet, we need to be increasingly concerned about how it is regulated. The Federal Communications Commission has proposed “network neutrality” rules, which would prohibit Internet service providers from discriminating against or charging premiums for certain services or applications on the Web. The commission is correct that ensuring equal access to the infrastructure of the Internet is vital, but it errs in directing its regulations only at service providers like AT&T and Comcast.
Today, search engines like Google, Yahoo and Microsoft’s new Bing have become the Internet’s gatekeepers, and the crucial role they play in directing users to Web sites means they are now as essential a component of its infrastructure as the physical network itself. The F.C.C. needs to look beyond network neutrality and include “search neutrality”: the principle that search engines should have no editorial policies other than that their results be comprehensive, impartial and based solely on relevance.
The need for search neutrality is particularly pressing because so much market power lies in the hands of one company: Google. With 71 percent of the United States search market (and 90 percent in Britain), Google’s dominance of both search and search advertising gives it overwhelming control. Google’s revenues exceeded $21 billion last year, but this pales next to the hundreds of billions of dollars of other companies’ revenues that Google controls indirectly through its search results and sponsored links.
One way that Google exploits this control is by imposing covert “penalties” that can strike legitimate and useful Web sites, removing them entirely from its search results or placing them so far down the rankings that they will in all likelihood never be found. For three years, my company’s vertical search and price-comparison site, Foundem, was effectively “disappeared” from the Internet in this way.
Another way that Google exploits its control is through preferential placement. With the introduction in 2007 of what it calls “universal search,” Google began promoting its own services at or near the top of its search results, bypassing the algorithms it uses to rank the services of others. Google now favors its own price-comparison results for product queries, its own map results for geographic queries, its own news results for topical queries, and its own YouTube results for video queries. And Google’s stated plans for universal search make it clear that this is only the beginning.
Because of its domination of the global search market and ability to penalize competitors while placing its own services at the top of its search results, Google has a virtually unassailable competitive advantage. And Google can deploy this advantage well beyond the confines of search to any service it chooses. Wherever it does so, incumbents are toppled, new entrants are suppressed and innovation is imperiled.
Google’s treatment of Foundem stifled our growth and constrained the development of our innovative search technology. The preferential placement of Google Maps helped it unseat MapQuest from its position as America’s leading online mapping service virtually overnight. The share price of TomTom, a maker of navigation systems, has fallen by some 40 percent in the weeks since the announcement of Google’s free turn-by-turn satellite navigation service. And RightMove, Britain’s leading real-estate portal, lost 10 percent of its market value this month on the mere rumor that Google planned a real-estate search service here.
Without search neutrality rules to constrain Google’s competitive advantage, we may be heading toward a bleakly uniform world of Google Everything — Google Travel, Google Finance, Google Insurance, Google Real Estate, Google Telecoms and, of course, Google Books. (more)

The reason Google has a near monopoly is because it offers relevant searches and useful services. Other search engines that started to place paid sites at the top of their queries quickly lost market share and are now all but dead. Google has always made it clear what is a paid placement and what isn't. There's a line that everyone can see separating the two and it works well. Their algorithm works well, that's the #1 reason they enjoy such a dominant position. Recently Microsoft's Bing has come up with a search that works either just as well, or nearly as well, but it's interesting that they've not been able to come up with a search that clearly works better than Google. Even so, Bing is gaining market share, though mostly at the expense of other search engines.

Google maps is far superior to Mapquest. Google maps will lead you to Google Street View, which is a great way to look around the neighborhood without having to drive there. I can only imagine the amount of money and resources it cost to photograph every single street and address from several different views and make it accessible.

In short, Google has a near monopoly because it's good, it's better than the competition, and because there are low barriers to entry, it has to keep on being good or else some other startup will take over. Only a few years ago, people were concerned that AOL and Yahoo would consolidate their monopoly positions as search/gateways to the internet. These concerns have proven to be ill-founded. If anything, AOL and Yahoo are fighting for their lives, fighting to keep relevant in a fast moving and very competitive online marketplace. I believe Yahoo finance is still the #1 finance site on the internet because it's the best. Google finance is not quite as good even though it has certain features Yahoo doesn't.

The internet is the last place government needs to worry about monopoly power and unfair competition. Government should be focusing on Ticketmaster and its monopoly of ticketing, this is an obvious monopoly that tries to inhibit competitors and offers very little yet charges outrageous fees that can be easily 50% of the ticket price. Just try and buy a bleacher ticket to a Dodger's game. $8 for the ticket, but add to that convenience fees of $3 and then mailing fees and service chargers of $2.50 and an additional $5.50 is added on a $8 ticket! How they can be allowed to merge with LiveNation is a mystery to me, where are the anti-trust regulators? Where is the Justice Department on this one? It's so obvious it's a joke.

Regulations can only work if the regulators do their jobs. That's why I'm so skeptical about new regulations and new government agencies that will supposedly cure all of our ills. If only they would start doing their jobs and uphold their current duties, I would be more willing to view regulation as a viable and even superior solution. Please do your jobs government bureaucrats! Perhaps we need a regulation that requires regulators to regulate.

Fixing Corporate America

2009-12-28T22:53:00.000-08:00

What we need are interests of owners (shareholders) and managers to be aligned, and a mechanism for owners to enforce discipline on mangers. With alignment, fraud and taking huge risks would not happen, Enron and the housing mortgage bubble would not have happened. All government needs to do is to legally empower owners to have control over what they own.

Why have we not employed this solution yet? Because it benefits neither government nor the managers who donate money to government. There is huge opposition by managers who are able to game the current system, and government has no incentive to make the changes needed so only inferior reforms are proposed.

All the reforms so far being discussed focus on empowering the government to act on behalf of owners to discipline managers. However that solution is far inferior to giving owners direct power to discipline. With government, interests are still not aligned. Government has its own agenda, some of which do not match that of owners. Owners would trade one master for another, and with government, an even more powerful master.

Those who are truly interested in stopping the abuse and ending what John Bogle calls Manager's Capitalism, need only to increase the power and ease by which owners can set manager pay and replace bad managers. Right now managers set their own pay by stacking compensation committees with other managers, and by staggering board nominations and preventing alternative proposals from appearing on the official, company paid, voting documents sent to each and every shareholder. This sets a high bar for shareholders to organize and inform other shareholders of an alternate slate of management. It also makes it difficult to set pay, the very best that can be done is to reject a compensation proposal, but shareholders can never actually make their own proposal without using their own money to mail and inform other shareholders that such a proposal exists.

The current abuse of the corporate structure can be solved, but there has to be enough will to make the right choices, for government officials and politicians to actually want to solve the problem rather than just increasing their own power and importance. That is the high bar to jump, it won't be easy, which is why there are no proposals being seriously discussed that will actually solve what ails corporate America.

The Policies of Job Destruction

2009-12-23T02:21:00.000-08:00

There's a lot of talk about creating jobs and industries, but with the same breath the pundits proscribe punitive measures that drive jobs and industries away. Government is not good at creating jobs or industries directly. Small businesses are the job creators, industries must find the investment environment attractive.

When expectations of high taxes, and a burdensome environment ensue, jobs will not be created. Look at the punitive tax increases the health care bill imposes, Congress is working overtime to find ways to get money from wherever it can. The regulatory environmental burdens seem to be at an all time high, why would anyone build industrial capacity here in the United States when cap and trade is being talked about and building any sort of factory or manufacturing plant has to go through tons of hurdles? Of course R&D is leaving, why bother to employ researchers when an additional 8-10% will have to be paid thanks to the health care bill? Those who already provide health care know that the bill will only raise health care costs at a time when they need to cut costs? Better just to move to a country without these burdens, this is why a policy of seizing wealth only drives away wealth and destroys the economy. Obama is destroying any prospect of a good recovery with his tax and destroy policies.

Now if taxpayers were getting something valuable in return for all the government spending, then that would cancel out the negatives of higher taxes. But there has been no focus whatsoever on getting value for government spending. All we see is pork and more pork, nothing that makes it easier for employees to get to work faster or for goods to be transported cheaper and quicker. Foreign nations have their negatives too. India's infrastructure is horrible, getting around Mumbai is a nightmare, and China's regulatory environment is even worse for businesses, you never know when the government might turn on you and seize everything you've invested like Russia. That investors are still looking to move to these countries shows how bad it's gotten in the United States, that the advantages the US offers is no longer enough because of all the additional burdens just imposed by Obama. Those who want job growth and capital investment here must make it worthwhile. Businessmen aren't stupid, they must be able to predict future demand and future costs. Everyone can see that the current path the government is taking is unsustainable, and everyone can see that there is no desire to cut future government spending, the budget will have to be balanced by tax increases. Knowing that, it would be foolish to invest in the United States. Not only are the Bush tax cuts going to expire soon, which means a tax increase, but there are serious discussions over a VAT tax and increasing taxes further than the expiration of Bush's cuts will impose. Again, people must think from the prospective of an investor, why should he invest in the United States when there are better opportunities elsewhere? Anger simply makes no difference to the investor, you can be as angry as you want, I'll just take my money where people are happy to see me and my wealth.

Conservatives and Liberals United Against Health Care Bill Madness

2009-12-20T04:30:00.000-08:00

It's incredible that this piece of crap can be passed with everyone against it. Conservatives and liberals both hate it, but somehow it's going through? I don't think it's too late to mount effective opposition, it's time to call the Senators that were on the fence and encourage them to switch over to a no vote. Then the House members, only one Senator has to switch and less than 10 Representatives.

Democrats need to oppose this bill and make sure it never passes. Everyone is in agreement that this is a piece of crap and will fail spectacularly. Once it fails, Democrats will get all the blame, they're the ones who crafted it, who passed it, who control all the levers of government, the backlash will be enormous, the progressive movement will be set back ten years, just as the conservative movement was set back by the horribly incompetent policies of Bush.

You all know what will happen, there is nothing in this bill that will reduce or control costs, when Americans find out that their health care will cost more and be no better, only worse, there will be a lot of anger. We elect Democrats and this is what we get? You can expect another 1994, time for people to DO SOMETHING and voice your displeasure with Senators and Representatives, tell them that you're not in their district but this bill affects everyone in this country and so you are telling them to vote no. If they don't, you'll donate to their opponent come election time and do everything you can to make sure they are defeated. This is the only type of populism that works, the only threat that Congressmen take seriously and the only weapon the people have as powerful as the ones wielded by the large corporations and special interests that have inserted all they've wanted into this bill.

Health Care Final Senate Bill Just More Pork!

2009-12-20T03:58:00.000-08:00

So this is what it comes down to, progress for the sake of progress. Passing a bill for the sake of a hollow victory, are you progressives sure you want what you're asking for? Going through the bill, I see nothing but giveaways and grants plus incentives and extra payments to different people and the creation of huge Trust Funds for politicians to dish out money. Oh, and the $200,000 and above tax on the rich isn't indexed to inflation!!! That means it's only a matter of time before we get bracket creep and everyone becomes subject to that tax just like with the AMT. Below are just some of the special programs and extra payments. At some point common sense has to take over and sensible people have to open their eyes and see that this bill is garbage. Blame this on the Republicans? How? This will be the end of your progressive reform, after two pork filled stimulus packages and now this crap, who will ever trust progressives again?

‘‘(1) GENERAL AMOUNTS FOR GRANTS.—For
8
the purpose of carrying out this section, in addition
9
to the amounts authorized to be appropriated under
10
subsection (d), there is authorized to be appro-
11
priated the following:
12
‘‘(A) For fiscal year 2010,
13
$2,988,821,592.
14
‘‘(B) For fiscal year 2011,
15
$3,862,107,440.
16
‘‘(C) For fiscal year 2012, $4,990,553,440.
17
‘‘(D) For fiscal year 2013,

$6,448,713,307.
19
‘‘(E) For fiscal year 2014,
20
$7,332,924,155.
21
‘‘(F) For fiscal year 2015,
22
$8,332,924,155.
23
‘‘(G) For fiscal year 2016, and each subse-
24
quent fiscal year, the amount appropriated for
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O:\KER\KER09924.xml [file 5 of 9] S.L.C.
the preceding fiscal year adjusted by the prod-
1
uct of—
2
‘‘(i) one plus the average percentage
3
increase in costs incurred per patient
4
served; and
5
‘‘(ii) one plus the average percentage
6
increase in the total number of patients
7
served.’’.
8

‘‘SEC. 9511. PATIENT-CENTERED OUTCOMES RESEARCH
9
TRUST FUND.
10
‘‘(a) CREATION OF TRUST FUND.—There is estab-
11
lished in the Treasury of the United States a trust fund
12
to be known as the ‘Patient-Centered Outcomes Research
13
Trust Fund’ (hereafter in this section referred to as the
14
‘PCORTF’), consisting of such amounts as may be appro-
15
priated or credited to such Trust Fund as provided in this
16
section and section 9602(b).
17
‘‘(b) TRANSFERS TO FUND.—
18
‘‘(1) APPROPRIATION.—There are hereby ap-
19
propriated to the Trust Fund the following:
20
‘‘(A) For fiscal year 2010, $10,000,000.
21
‘‘(B) For fiscal year 2011, $50,000,000.
22
‘‘(C) For fiscal year 2012, $150,000,000.
23
‘‘(D) For fiscal year 2013—
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O:\MAL\MAL09852.xml [file 6 of 9] S.L.C.
‘‘(i) an amount equivalent to the net
1
revenues received in the Treasury from the
2
fees imposed under subchapter B of chap-
3
ter 34 (relating to fees on health insurance
4
and self-insured plans) for such fiscal year;
5
and
6
‘‘(ii) $150,000,000.
7
‘‘(E) For each of fiscal years 2014, 2015,
8
2016, 2017, 2018, and 2019—
9
‘‘(i) an amount equivalent to the net
10
revenues received in the Treasury from the
11
fees imposed under subchapter B of chap-
12
ter 34 (relating to fees on health insurance
13
and self-insured plans) for such fiscal year;
14
and
15
‘‘(ii) $150,000,000.
16
The amounts appropriated under subpara-
17
graphs (A), (B), (C), (D)(ii), and (E)(ii) shall
18
be transferred from the general fund of the
19
Treasury, from funds not otherwise appro-
20
priated.
21
‘‘(2) TRUST FUND TRANSFERS.—In addition to
22
the amounts appropriated under paragraph (1),
23
there shall be credited to the PCORTF the amounts
24
1691
O:\MAL\MAL09852.xml [file 6 of 9] S.L.C.
transferred under section 1183 of the Social Secu-
1
rity Act.
2

What's Wrong with California

2009-12-03T01:49:00.000-08:00

What's wrong with California? I've collected a few articles that highlight the reasons why California is in such serious trouble. A couple of friends have already moved away, I'm thinking of moving myself. If you don't understand what is going on with California, the articles below will reveal the hellhole I call home.

City Journal says,

When I recently appeared on Glenn Beck’s TV show to discuss California’s dreadful fiscal situation, I mentioned that in Orange County, where I had been a columnist for the Orange County Register, the average pay and benefits package for firefighters was $175,000 per year. After the show, I heard from viewers who couldn’t believe the figure, but it’s true. Firefighters, like all public-safety officials in California, also receive a gold-plated retirement plan: a defined-benefit annual pension that offers 90 percent or more of the worker’s final year’s pay, guaranteed for the rest of his life (and the life of his spouse).

Government employees use various scams to boost their already generous benefits, which include fully paid health care and cost-of-living adjustments. The Sacramento Bee coined the term “chief’s disease,” for example, to refer to the 82 percent (in 2002) of chief’s-level employees at the California Highway Patrol who discovered a disabling injury about one year before retiring. That provides an extra year off work, with pay, and shields 50 percent of their final retirement pay from taxes. Most of these disabilities stem from back pain, knee pain, irritable bowel syndrome, and the like—not from taking bullets from bad guys. The disability numbers soared after CHP disbanded its fraud unit.

From the Sac Bee

Just days before Gov. Arnold Schwarzenegger and legislators finalized a water package, including an $11.1 billion bond issue, state Treasurer Bill Lockyer warned them not to do it.
California is already deeply in debt, Lockyer warned, has huge budget deficits and can't afford another big bond issue.
"The days of blithely heaping more and more debt burden on the general fund are over – at least they should be," Lockyer said.

The earmark-laden bond issue, the package's single most controversial element, raises an interesting question: Just how deeply in debt are our state and local governments?
The answer: No one knows for certain, since debt is scattered through myriad agencies in many forms, but well over a half-trillion dollars is a fair estimate.
Lockyer's warning pertained to the state's "general obligation debt," which currently stands at $59 billion, and there are an additional $50-plus billion in general obligation bonds that have not yet been sold. The biggest chunks of debt, however, are the unfunded obligations for pensions and health care of retired public employees.
The latest annual pension report from the state controller covers 2006, when the unfunded liability was $64 billion. But since then, state and local pension funds have lost at least $150 billion on investments, so a reasonable estimate of today's unfunded liability is $200-plus billion. A state commission, meanwhile, says the state-local liability for retiree health care is about $100 billion.
No one keeps complete data on local government general obligation debt, but it appears to be roughly the same as the state's, perhaps $50 billion, plus several billion dollars in debt incurred by local redevelopment agencies.
There are tens of billions in specialized state debt, such as veteran home loan bonds, "securitization" of tobacco lawsuit proceeds, and budget deficit bonds.
The interest that must be paid on all that state and local debt is probably an additional $100 billion, so we're already talking about well over $500 billion.

Forbes weighs in,

Right now California's economy is moribund, and the prospects for a quick turnaround are not good. Unable to pay its bills, the state is issuing IOUs; its once strong credit rating has collapsed. The state that once boasted the seventh-largest gross domestic product in the world is looking less like a celebrated global innovator and more like a fiscal basket case along the lines of Argentina or Latvia.

It took some amazing incompetence to toss this best-endowed of places down into the dustbin of history. Yet conventional wisdom views the crisis largely as a legacy of Proposition 13, which in effect capped only taxes.

This lets too many malefactors off the hook. I covered the Proposition 13 campaign for the Washington Post and examined its aftermath up close. It passed because California was running huge surpluses at the time, even as soaring property taxes were driving people from their homes.

Admittedly it was a crude instrument, but by limiting those property taxes Proposition 13 managed to save people's houses. To the surprise of many prognosticators, the state government did not go out of business. It has continued to expand faster than either its income or population. Between 2003 and 2007, spending grew 31%, compared with a 5% population increase. Today the overall tax burden as percent of state income, according to the Tax Foundation, has risen to the sixth-highest in the nation.

The media and political pundits refuse to see this gap between the state's budget and its ability to pay as an essential issue. It is. (This is not to say structural reform is not needed. I would support, for example, reforming some of the unintended ill-effects of Proposition 13 that weakened local government and left control of the budget to Sacramento.)

But the fundamental problem remains. California's economy--once wondrously diverse with aerospace, high-tech, agriculture and international trade--has run aground. Burdened by taxes and ever-growing regulation, the state is routinely rated by executives as having among the worst business climates in the nation. No surprise, then, that California's jobs engine has sputtered, and it may be heading toward 15% unemployment.

So if we are to assign blame, let's not start with the poor, old anti-tax activist Howard Jarvis (who helped pass Proposition 13 and passed away over 20 years ago), but with the bigger culprits behind California's fall. Here are five contenders:

National Affairs writes,

It would be difficult to overstate the magnitude of California's troubles. In economic terms, the state is simply broke: issuing IOUs as payments for goods and services, begging the federal government to back state debt (a request the Obama administration denied), and watching its credit rating plummet. To address a $42 billion shortfall in February of this year, the legislature enacted a package that included the largest state tax increases in American history, leaving California with the highest sales and personal income-tax rates in the country (though Hawaii would supplant its lead in the latter category in May). When another $26 billion shortfall emerged by summer, lawmakers — chastened by the 2-1 rejection of further tax hikes in a May 19 special election — agreed on another package that featured more than $16 billion in spending reductions, including deep cuts to education, health, and social services.

That's not even the worst of it. For all of the high drama that has accompanied 2009's fiscal travails (a stunning populist backlash against high taxes, widespread public-employee protests over spending cuts), California's lawmakers let the crisis go to waste — failing to use the moment to improve the state's financial outlook. As the San Diego Union-Tribune's John Marelius noted:

[California projects] a deficit of between $7 billion and $8 billion for the next budget cycle. Plus, federal stimulus money, $5 billion of which was used to backfill education cuts this year, may not be available. And about the time the next governor takes office, $16 billion in temporary tax increases that were included in [the] February budget deal will expire.

As if that weren't apocalyptic enough, California's short-term financial difficulties pale in comparison to its long-term obligations. In the most recent fiscal year, the California Public Employees' Retirement System and the California State Teachers' Retirement System, the state's two largest pension plans, lost a combined total of nearly $100 billion — about a quarter of their value — in the market downturn. If legislators thought tackling a $60 billion deficit was trying, they are sure to love the challenge of making good on California's fixed pension obligations — which Governor Arnold Schwarzenegger has estimated are $300 billion in the red.

And fiscal troubles are just the tip of the iceberg. California's percentage of adults without at least a high-school education is the second-highest in the nation (and the fact that 72% of those without diplomas are immigrants only fuels the state's growing problem of social stratification). The Commonwealth Fund has ranked the quality of California's health care lowest of the 50 states. The state has the highest rate of criminal recidivism in the country. It has six of the ten worst cities in the country in air pollution. Los Angeles and San Francisco have some of the most congested roads in the nation, which costs the state's employers billions in lost productivity each year. The state is seriously discussing mandatory water rationing, and has in recent years experienced severe disruptions of its electricity supply. Unemployment is over 11%, and a recent survey of corporate CEOs ranked California the worst state in the country in which to do business. It is losing native-born citizens faster than any other state.

Finally, the New York Times offers another clue as to why California is imploding,

Still, what California does often takes on outsized significance because the state’s welfare rolls are outsized. In July, while looking for budget cuts, Mr. Schwarzenegger complained that California had 12 percent of the nation’s population but 30 percent of the people on welfare.
As elsewhere, California’s welfare rolls plummeted after the 1996 national overhaul of welfare, from 921,000 families in 1995 to 466,000 families in 2008, but they did not fall as much as in most states. In the recession, rolls have climbed and are projected to reach 557,000 families in 2010, or about 1.3 million individuals.
Parents with special hardships or the youngest babies have always been exempt from work requirements in California, but now two large groups making up one-third or more of all applicants can also opt out: single parents with a child age 1 to 2, or those with two children under 6.
Ms. Zendejas, 20, is the mother of two boys under 6. She has worked part time as a supermarket cashier, but under the old work-to-welfare rules she was supposed to spend an additional 15 hours in vocational training or searching for a more stable job, an effort that she found too hard to juggle, resulting in a financial penalty.
Now she needs to do none of that to get her check, and the penalty of more than $120 a month is ending, too. “It’s a relief,” she said.

The shit is hitting the fan. It won't be long now until the final confrontation between the various leeches who are sucking Californians dry and the taxpayers who have clearly reached their limits. After a record tax increase and already with the nation's highest sales taxes and second highest income taxes, the budget deficit will again be in the tens of billions. Stay tuned.

It's the Details Stupid! Wisdom of a Second Stimulus

2009-11-30T22:40:00.000-08:00

It's the details that are important! Government spending can only be good NET DEFICIT if the spending produces long term benefits that will outweigh the costs. In other words, it has to be a good value or else the spending will be a hindrance.

It's like someone at age 18 with a host of choices. Going into debt $80,000 or more can be worthwhile if they are able to get something, like an education, that allows them to more than make up for what they've spent. But if they blow $80,000 on girls and drugs, there'll be a temporary lift, but after the money is spent, their future will be even more bleak being $80,000 in debt.

Obama's problem is that he doesn't seem interested in the details. He let Congress waste the first stimulus instead of crafting his own stimulus plan. That's why there is no support for a second stimulus. The 18 year old has shown himself to be irresponsible by blowing the first installment of his loan. Why bother loaning him more money? There are consequences to waste and ineffective legislation!

New Scandal Over Global Warming Data

2009-11-24T22:43:00.000-08:00

Uh oh, leaked e-mails from a prominent global warming research group, the Climatic Research Unit of the University of East Anglia in eastern England, reveal that data might have been falsified, cherry-picked, or made up. Other documents and e-mails reveal that the climate model the CRU uses to predict and make their case for future global warming is so riddled with errors and bad code that it is virtually worthless. The CRU's data and model were major contributors in the UN's Intergovernmental Panel on Climate Change's 2007 report. The UN's report is what the United States EPA relies on most heavily to argue that carbon dioxide emissions endanger public health and thus need to be regulated. It all looks like a house of cards that is about to fall. Here is the link to the CBS News article quoted below.

A few days after leaked e-mail messages appeared on the Internet, the U.S. Congress may probe whether prominent scientists who are advocates of global warming theories misrepresented the truth about climate change.

Sen. James Inhofe, an Oklahoma Republican, said on Monday the leaked correspondence suggested researchers "cooked the science to make this thing look as if the science was settled, when all the time of course we knew it was not," according to a transcript of a radio interview posted on his Web site. Aides for Rep. Darrell Issa, a California Republican, are also looking into the disclosure.

The leaked documents (see our previous coverage) come from the Climatic Research Unit of the University of East Anglia in eastern England. In global warming circles, the CRU wields outsize influence: it claims the world's largest temperature data set, and its work and mathematical models were incorporated into the United Nations Intergovernmental Panel on Climate Change's 2007 report. That report, in turn, is what the Environmental Protection Agency acknowledged it "relies on most heavily" when concluding that carbon dioxide emissions endanger public health and should be regulated.

Last week's leaked e-mails range from innocuous to embarrassing and, critics believe, scandalous. They show that some of the field's most prominent scientists were so wedded to theories of man-made global warming that they ridiculed dissenters who asked for copies of their data ("have to respond to more crap criticisms from the idiots"), cheered the deaths of skeptical journalists, and plotted how to keep researchers who reached different conclusions from publishing in peer-reviewed journals.

One e-mail message, apparently from CRU director Phil Jones, references the U.K.'s Freedom of Information Act when asking another researcher to delete correspondence that might be disclosed in response to public records law: "Can you delete any emails you may have had with Keith re AR4? Keith will do likewise." Another, also apparently from Jones: global warming skeptics "have been after the CRU station data for years. If they ever hear there is a Freedom of Information Act now in the UK, I think I'll delete the file rather than send to anyone." (Jones was a contributing author to the chapter of the U.N.'s IPCC report titled "Detection of Climate Change and Attribution of Causes.")

In addition to e-mail messages, the roughly 3,600 leaked documents posted on sites including Wikileaks.org and EastAngliaEmails.com include computer code and a description of how an unfortunate programmer named "Harry" -- possibly the CRU's Ian "Harry" Harris -- was tasked with resuscitating and updating a key temperature database that proved to be problematic. Some excerpts from what appear to be his notes, emphasis added:
I am seriously worried that our flagship gridded data product is produced by Delaunay triangulation - apparently linear as well. As far as I can see, this renders the station counts totally meaningless. It also means that we cannot say exactly how the gridded data is arrived at from a statistical perspective - since we're using an off-the-shelf product that isn't documented sufficiently to say that. Why this wasn't coded up in Fortran I don't know - time pressures perhaps? Was too much effort expended on homogenisation, that there wasn't enough time to write a gridding procedure? Of course, it's too late for me to fix it too. Meh.

I am very sorry to report that the rest of the databases seem to be in nearly as poor a state as Australia was. There are hundreds if not thousands of pairs of dummy stations, one with no WMO and one with, usually overlapping and with the same station name and very similar coordinates. I know it could be old and new stations, but why such large overlaps if that's the case? Aarrggghhh! There truly is no end in sight... So, we can have a proper result, but only by including a load of garbage!

One thing that's unsettling is that many of the assigned WMo codes for Canadian stations do not return any hits with a web search. Usually the country's met office, or at least the Weather Underground, show up – but for these stations, nothing at all. Makes me wonder if these are long-discontinued, or were even invented somewhere other than Canada!

Knowing how long it takes to debug this suite - the experiment endeth here. The option (like all the anomdtb options) is totally undocumented so we'll never know what we lost. 22. Right, time to stop pussyfooting around the niceties of Tim's labyrinthine software suites - let's have a go at producing CRU TS 3.0! since failing to do that will be the definitive failure of the entire project.

Ulp! I am seriously close to giving up, again. The history of this is so complex that I can't get far enough into it before by head hurts and I have to stop. Each parameter has a tortuous history of manual and semi-automated interventions that I simply cannot just go back to early versions and run the update prog. I could be throwing away all kinds of corrections - to lat/lons, to WMOs (yes!), and more. So what the hell can I do about all these duplicate stations?...

As the leaked messages, and especially the HARRY_READ_ME.txt file, found their way around technical circles, two things happened: first, programmers unaffiliated with East Anglia started taking a close look at the quality of the CRU's code, and second, they began to feel sympathetic for anyone who had to spend three years (including working weekends) trying to make sense of code that appeared to be undocumented and buggy, while representing the core of CRU's climate model.

One programmer highlighted the error of relying on computer code that, if it generates an error message, continues as if nothing untoward ever occurred. Another debugged the code by pointing out why the output of a calculation that should always generate a positive number was incorrectly generating a negative one. A third concluded: "I feel for this guy. He's obviously spent years trying to get data from undocumented and completely messy sources."

Programmer-written comments inserted into CRU's Fortran code have drawn fire as well. The file briffa_sep98_d.pro says: "Apply a VERY ARTIFICAL correction for decline!!" and "APPLY ARTIFICIAL CORRECTION." Another, quantify_tsdcal.pro, says: "Low pass filtering at century and longer time scales never gets rid of the trend - so eventually I start to scale down the 120-yr low pass time series to mimic the effect of removing/adding longer time scales!"

More on cherry picking from this site.

And more evidence of fraud/cherry picking here.

Fake Job Creation Numbers

2009-11-19T21:39:00.000-08:00

More on the wastefulness of the $787 first stimulus. And we're told we need another? No thank you.

http://online.wsj.com/article/SB10001424052748704204304574544063776158046.html?mod=loomia&loomia_si=t0:a16:g2:r2:c0.122208:b28961300

At least funny bones are being stimulated by the Obama Administration's $787 billion economic stimulus bill.

To wit, how many Americans does it take to make nine pairs of work boots? According to the White House's recovery.gov site, an $890 shoe order for the Army Corps of Engineers, courtesy of the stimulus package, created nine new jobs at Moore's Shoes & Services in Campbellsville, Kentucky.

The job-for-a-boot plan may not be American productivity at its best. But such stories go a ways toward explaining how the Administration has come up with 640,329 jobs "created/saved" by the American Recovery Act as of October 30.

Jonathan Karl of ABC News deserves credit among Beltway reporters for committing journalism and actually fact-checking White House claims. Head Start in Augusta, Georgia claimed 317 jobs were created by a $790,000 grant. In reality, as Mr. Karl reported this week, the money went toward a one-off pay hike for 317 employees.

Other media outlets and government watchdog groups have also found numerous errors in the stimulus filings. Jobs have been overstated or counted multiple times. One Alabama housing authority claimed that a $540,071 grant would create 7,280 jobs. The Birmingham News reports that only 14 were created. In some cases, Recovery Act funds went to nonexistent Congressional districts, such as the 26th in Louisiana or the 12th in Virginia. Up to $6.4 billion went to imaginary places in America, according to the Franklin Center for Government and Public Integrity.

Asked by the New Orleans Times-Picayune why so many recipients would misstate their districts, Ed Pound, the director of communications for the Obama Administration's recovery.gov, said, "Who knows, man, who really knows."

Internet Piracy: A Response to Pirates' Justifications

2009-11-09T12:29:00.000-08:00

I can't believe either the irrational crap coming out of these people trying to defend pirating. Do any of you understand economics? Logic? You see, there are certain things called goods. People want goods, the very act of trying to get a good means you want it, and that means it has some value.

So we're supposed to believe you will take time to download stuff you do not enjoy and you do not want? That's ridiculous and no intelligent person will even bother making that defense. Do you go around taking grass from parks and front yards? Do you take sand from the beach? No, you won't bother to voluntarily spend time to collect stuff that is worthless to you, the very fact that you do spend time downloading music, movies, or software means that they have value, and means you are getting something for nothing. In the real world, that's usually only possible with theft.

If it's worth nothing to you, then it won't hurt you if it is taken away and you don't ever spend time on it. If there were a pile of sand in your room, would you care if I took it away? No, maybe you'd even pay me to take it away. If these games and stuff are truly worthless, that you aren't getting any benefit, then it shouldn't matter if I prevent you from accessing these things beyond the free demos and trailers given to you buy the owners. You can prevent me from accessing toxic waste, that's worthless to me and I don't care that I can't have toxic waste or play round in it. You can also come and take away what I put in the trash bin anytime you want and I don't care. I'd actually thank you for taking it away, again, it is worthless to me. But it's funny to hear you people complain so loudly about having your "worthless" music and software taken away from you. Why you'd think it was WORTH SOMETHING to you the way you argue and try to make LAME excuses that are so easily dismissed that the very intelligence of those making them has to be questioned. THIS is the best you can come up with? We all know you pirates are getting something valuable and not paying. That's wrong, and that's destructive for the economy and for society. We cannot have a class of people (artists, bookwriters, software developers, etc.) who are not allowed to make money for their labor. That would be slavery and no one allows that anymore. If they should be allowed to make money from providing you a VALUEABLE good or service, then it's up to them to decide the price. Yes, too high a price and you won't buy. Too bad for them huh? The seller absolutely has a right to set a price or to reject a price for the goods/services he is selling. I could go on and on destroying every argument you pirates make, but I think the point has been made. Enough of your BS, you can't justify pirating and so the decent people of society WILL stop you.

Pirating can't be stopped, really? What if a mandatory 5 year jail term in federal prison PER item pirated with NO chance of parole or early release? Are you still sure? How about mandatory software that comes with every computer and every OS that tracks and reports to a government agency what you are doing on your computer so encryption can't hide your piracy? Add that to the mandatory jail term in federal prison, do you still want to tell me piracy can't be stopped? Piracy can be stopped with very draconian and invasive procedures, it's best for society if some other means could be found to make pirates stop without resorting to those measures. The first step is to stop enabling pirates. Take away their BS arguments and make it clear that they have no justification whatsoever for what they are doing. Just like the thief can't claim poverty or that someone else stole from him, as justification to steal. We have to establish in EVERYONE's minds that pirating is wrong. Some people won't do an act that they consider wrong even if they can do it and get away with it. That's a start, but it needs to happen or the draconian stuff will be the only solution left.

Using Social Forces to Raise Taxes

2009-11-04T14:12:00.000-08:00

The focus of my post was to point out that we should consider using all the fields of social science to deal with broad based social issues such as greed and morality.

To continue as an example, tax rates could be raised much easier if social praise and reinforcement were given to those who paid the most taxes. Costless praise and other forms of recognition such as a "national taxpayers day" where high tax payers received kudos for their generosity and a brief statement by politicians acknowledging that the nation's operations rests on their shoulders (true or not) would lessen the opposition to higher taxes. Social rewards are a type of currency that can be used in exchange for monetary currency. That's why in previous large scale wars like WWII, every nation involved used praise and shame to raise enormous amounts of money and quell discontentment over the low level of consumer goods provided to society. Almost everyone bought War Bonds even though they knew the low interest and unfavorable terms were likely to produce an economic loss for the buyer. Yet the social rewards outweighed the economic gain. There is a case where "greed" and "self-interest" in economic terms were overcome by costless (economic) social forces at work. The same forces can be heralded again to produce positive outcomes.

Wall Street Greed, Economics, and Society

2009-11-04T13:42:00.000-08:00

Economics is only one of the fields of social science. It seems greed and self-interest in our society, are being examined solely within the realm of economics, completely ignoring that there are many other social forces at work.

Social norms and mores are incredibly powerful and greatly influence behavior within societies at all times. Group dynamics and acceptable norms can override economic self-interest.

There is almost no mention of moral relativism and the degradation of using social pressure to enforce norms. As John Bogle noted in his books, "Enough", and "Fight for the Soul of Capitalism", it used to be that managers had a sense of duty towards the owners. Likewise, people didn't take advantage of government programs unless they had to, many felt ashamed to take charity and would do their best to avoid the welfare label. It seems the shame of managers enriching themselves and dependence upon public charity has eroded to the point where social pressure no longer exists. Could they be related? Could the new social message of, you are entitled to get these benefits if you are qualified to, if you can legally, regardless if you need it or deserve it? What I see today is a focus on legality, not morality. If it's legal, it's right, there's no shame in doing something that is legal but morally despicable because morality is no longer agreed upon. That could be good or bad, but the weakness and lack of a cohesive moral code means that social forces are weaker too, and that could explain much of the breakdown in ethics we are seeing today.

Who's values, who's morality? That's a refrain often repeated, and it might be good overall to question certain social mores and all societies change their codes of conduct over time. We could be in one of the times of great change. Nevertheless, that also weakens the ability for society to restrict behavior. If it can't be said that some behavior is "wrong", then the only question that remains is, "is it legal?". This is increasingly the question I see being asked today. Right and wrong are simply not factors considered when making decisions. We should not use economics alone to analyze broad social behaviors, all of the fields of social science should be employed in such an analysis.

Linking Government, Tax Rates, and Economic Growth

2009-11-04T12:14:00.000-08:00

Tax policy does have an effect on the overall economy. However it's hard to measure because of the lack of a "control" group. How much would have economic growth grown had taxes been lower? Perhaps we would have had a 4% growth rate instead of 3%, it's difficult to determine what if.

That's why the studies referenced below are important.

http://www.voxeu.org/index.php?q=node/4144

http://www.asymptosis.com/an-open-letter-to-robert-barro.html

http://www.asymptosis.com/europe-vs-us-who%E2%80%99s-winning.html

Unlike other studies, they try and control for other factors leaving tax rates as the variable, this is how any good study of a variable should proceed. These are the only types of studies I know of that try and control for other variables. It's nearly worthless to compare tax rates across different eras to come to a conclusion because of the different conditions that exist. The best we can do is compare countries with similar conditions and with differing tax rates to get an answer. Yet there are so many variables that even those studies cannot completely eliminate outside factors. Still, the studies confirm basic economic theory, that taxes are distortionary and are a negative factor to economic growth. Now people should also see that taxes translate into government spending and that can have positive benefits. It is possible for those positive benefits to outweigh the negatives of a tax, an easy example is the construction of a bridge or road to reduce transportation costs which stimulates economic growth. So it seems that higher taxes can be positive ONLY if the taxes are spent in a way that produces more benefits than the cost of the tax. You can disagree with my analysis of the data, but you should visit the website anyway because there are good and constructive analysis from both sides. Given today's government with its high inefficient manner of allocating resources and spending, it seems highly unlikely to me that the proceeds from a higher tax would be spent wisely.

Are Profits Responsible for the High Costs of Health Care?

2009-10-30T02:27:00.000-07:00

I remember reading a study showing that even if all profits were stripped out of health care, the United States would still spend more on health care than the OCED average. Actually, we don't need a study to see this, using OCED figures, we would have to cut spending per person by more than 2/3rds to get to the OCED average.

July 1, 2009

Organisation for Economic Co-operation and Development (OECD) Health Data

Total health care spending per person, 2007 *

United States ( 7290)
OCED average ( 2964)

Australia ( 3137)
Austria ( 3763)
Belgium ( 3595)
Canada ( 3895)
Czech Republic ( 1626)
Denmark ( 3512)
Finland ( 2840)
France ( 3601)
Germany ( 3588)
Greece ( 2727)
Hungary ( 1388)
Iceland ( 3319)
Ireland ( 3424)
Italy ( 2686)
Japan ( 2581)
Korea ( 1688)
Luxembourg ( 4162)
Mexico ( 823)
Netherlands ( 3837)
New Zealand ( 2510)
Norway ( 4763)
Poland ( 1035)
Portugal ( 2150)
Slovak Republic ( 1555)
Spain ( 2671)
Sweden ( 3323)
Switzerland ( 4417)
Turkey ( 615)
United Kingdom ( 2992)

I find it hard to believe that profits make up 2/3rds of the cost of health care. This flies in the face of all the financial statements filed by health care providers. Profits are not the main component of health care costs.

It's also untrue that "The American system relies more on individual consumer decisions and market forces than any other health care system in place" as stated by Devin. The individual consumer makes very few decisions, the decisions are made by the insurance company or HMO, AND doctors.

In our health system, the doctors are the ones who decide the appropriate treatment and course of action. Insurers can only deny coverage if the treatment is not deemed medically necessary for health (like cosmetic) or if there are pre-existing conditions. Insurers don't have a choice if the procedure is recommended by a doctor and it's to treat a medical condition.

Doctors do not consider costs as they are not the ones paying, in fact, they usually receive payments from whatever treatment they order. There is no method currently that tries to distribute health care based on value, that is getting the most bang for the buck.

A treatment that is only 90% as effective as the most effective treatment but only costs 50% as much will not be used. The patient and doctor will demand the most effective means of treatment, regardless of cost. To lower costs, we will have to insert value somehow as one of the components to calculate the appropriate treatment. But patients and doctors are opposed to this as that would mean the odds for survival would be reduced, if only marginally.

In other countries, the government decides on the value component. More effective, yet much more costly procedures are denied or not covered by the government health insurance. There was a ruckus a year or two ago about Britain's NIH denying an Alzheimer drug that was shown to delay the onset of Alzheimers by an average of 6 months. The government decided that it wasn't worth the cost of the drug and denied the treatment. Only after massive protests did the government reconsider. Most decisions aren't challenged though, so many treatments Americans get aren't available to patients in other countries, unless they pay 100% out of pocket that is. Some countries prevent even that, forcing patients to go out of country.

I believe it's the lack of a cost/benefit component to treatment decisions that is responsible for most of the high health care costs. People receive the best treatment the doctor is aware of regardless of cost. We see this with the use of drugs under patent instead of generics even if the patented drug is only 5%-10% more effective yet triple or more the cost. Yet should insurance companies, the only goalkeeper to costs, tries to deny that drug in favor of the generic, patients get upset and accuse the insurance company of greed and killing patients for profit.

Americans have to be willing to accept rationing, which is what cost/benefit analysis does. There is no way around it. They must accept a lower chance of survival, even if only slightly, so that the most cost effective treatment can be mandated. Until Americans, including the people on this board who hysterically deny the need for rationing, accept this, costs will remain high.

Health Care Bill Giveaways

2009-10-30T02:11:00.000-07:00

Wow, just got through reading the summaries and skimming over the bill. I don't see how this bill will not cost us a LOT more to provide health care. It drastically expands the subsidies to "low-income" people and also expands Medicaid to cover more people. It also removes lifetime caps from all policies! Just some of the benefits that are being added from the government webpage:

* It will end increases in premiums or denials of care based on pre-existing conditions, race, or gender, and strictly limit age rating.
* The proposal will also eliminate co-pays for preventive care, and cap out-of-pocket expensesto protects every American from bankruptcy.

Improving quality of care for every American. The legislation will ensure that Americans of all ages, from young children to retirees have access to greater quality of care by focusing on prevention, wellness, and strengthening programs that work.

* Guarantees that every child in America will have health care coverage that includes dental, hearing and vision benefits.
* Provides better preventive and wellness care. Every health care plan offered through the exchange and by employers after a grace period will cover preventive care at no cost to the patient.
* Increases the health care workforce to ensure that more doctors and nurses are available to provide quality care as more Americans get coverage.
* Strengthens Medicare and Medicaid and closes the Medicare Part D ‘donut hole’ so that seniors and low-income Americans receive better quality of care and see lower prescription drug costs and out-of-pocket expenses.

Even more found elsewhere:

INCREASE DEPENDENT AGE FOR POLICIES THROUGH AGE 26: Allows those through age 26 not otherwise
covered to remain on their parents’ policies at their parents’ discretion.

COBRA EXTENSION: Allows individuals to keep their COBRA coverage until the Exchange is up and running.
[NOTE: This is separate from the Recovery Act provisions that provide premium assistance for selected groups.]

ENSURING RECONSTRUCTIVE SURGERY FOR CHILDREN: Requires plans to pay for reconstructive surgery for
children with deformities.

Even more:

IIMMPPRROOVVEEDD BBEENNEEFFIITTSS
CREATES REINSURANCE FOR EARLY RETIREES: Creates a new temporary reinsurance program to help offset
the cost of coverage for companies that provide early retiree health benefits for those ages 55-64.

IMMEDIATE HELP FOR THE UNINSURED (INTERIM HIGH-RISK POOL): Creates a $5 billion fund, modeled after
the President’s plan, to finance an immediate, temporary insurance program for those who are uninsurable
because of pre-existing conditions.

NEW LONG-TERM CARE PROGRAM (CLASS ACT): Creates a new, voluntary, public long-term care insurance
program to help purchase services and supports for people who have functional limitations. Benefits are a
daily or weekly cash benefit to help people with functional limitations purchase the services and supports
needed to maintain personal and financial independence. CLASS would supplement, not supplant, traditional
payers of long-term care (e.g. Medicaid and/or private long term care insurance).

PPUUBBLLIICC HHEEAALLTTHH IIMMPPRROOVVEEMMEENNTTSS
INCREASES FUNDING FOR COMMUNITY HEALTH CENTERS: Provides increased funding for community health
centers that will allow them to double the number of patients served over the next five years.

IMPLEMENTS NEW PREVENTIVE HEALTH SERVICES PROGRAM IN COMMUNITIES: Provides immediate
funding for preventive services at the community and local level to address public health problems such as
obesity, tobacco use, and diabetes.

EXPANDS PRIMARY CARE, NURSING AND PUBLIC HEALTH WORKFORCE: Increases access to primary care by
sustaining the current efforts to increase the size of the National Health Service Corps. Primary care and nurse
training programs are also immediately expanded to increase the size of the primary care and nursing
workforce. Ensures that public health challenges are adequately addressed.

EMPLOYER WELLNESS PROGRAMS: Establishes a grant program for employers to promote healthy behaviors
among their employees.

And even more!!!!

BEGINS TO FILL IN THE MEDICARE PART D DRUG DONUT HOLE: Provides for a 50% discount on brand-name
drugs in the Part D donut hole, and immediately shrinks the size of the donut hole by $500 in 2010. The donut
hole continues to be narrowed over the coming years until it is fully eliminated by 2019.

ALLOWS STATES TO COVER LOW-INCOME INDIVIDUALS WITH HIV: Gives States the option of extending
Medicaid coverage to HIV-positive individuals and provides enhanced federal matching payments for the costs
of care.

INCREASES REIMBURSEMENT FOR PRIMARY CARE IN MEDICAID: Brings reimbursement for primary care
services in Medicaid up to Medicare levels with 100% federal funding (phased in over several years).

PROVIDES FOR 12-MONTH CONTINUOUS ELIGIBILITY IN CHIP: Provides continuity of care for children by
requiring that states provide 12-month continuous eligibility for children in the CHIP program

ELIMINATES BARRIERS TO ENROLLMENT IN MEDICARE LOW-INCOME SUBSIDY FOR PART D DRUG
PROGRAM: Eases burdens on enrollment so more low-income beneficiaries can get the financial help they
need to make health care affordable.

NEW PROTECTIONS IN MEDICARE ADVANTAGE: Limits cost-sharing for services in Medicare Advantage plans
to no more than cost-sharing in traditional Medicare, and provides for bonus payments to high-quality plans.

ESSENTIAL BENEFITS: In preparation for reform, the Health Benefits Advisory Committee reports their
recommended essential benefits package to the Secretary of HHS for adoption.

Additional federal funds to states with high unemployment. Assists States in maintaining access to
Medicaid services during the recession by extending the current Recovery Act increase in federal Medicaid
payments to states with high unemployment rates.

IMPROVES LOW-INCOME PROTECTIONS IN MEDICARE: Increases the assets test limits in the Part D drug
program and Medicare Savings Programs to ensure that more low-income beneficiaries get the financial help
they need to make their health care affordable.

EXTENDS MONTHS OF COVERAGE OF IMMUNOSUPPRESSIVE DRUGS FOR KIDNEY TRANSPLANT PATIENTS:
Lifts the current 36-month limitation on Medicare coverage of immunosuppressive drugs for kidney transplant
patients who would otherwise lose this coverage on or after 2012.

I didn't bother to go on because this post is already getting too long. How much will this all cost? The site says zero for the first 10 years, actually a positive $100 to the deficit in the first 10 years, but I'm waiting to see the total cost, I bet most of the costs are delayed in order to game the 10 year projection the CBO issues, the numbers breakdown is not yet available. Wow, a whole bunch of giveaways and expanded services, I just don't see where the cost savings would come from and how we're going to pay for the real costs once the plan is implemented and real numbers come in instead of these projections. More posts later

Observations on Bubbles

2009-10-29T00:00:00.000-07:00

Bubbles are only obvious after the fact. I thought there was a housing bubble, but I also thought we had a bond bubble too when 30-year Treasury bonds were near 5%. It could be that the bond bubble is still ongoing and will pop soon, or next year, or not at all. Gold is another case. I don't think there is a bubble in gold, the heightened attention paid to it reflects the unease people feel towards the ballooning balance sheets of central banks and the unsupportable budget deficits of certain nations. Yet there are others who think gold is pretty much worthless outside its value for industrial purposes. Is gold in a bubble right now? Too hard to say. Should gold drop to $450 then it becomes obvious and we can look back at the gold bubble and blast the idiots who couldn't see something so obvious. Stock market P/E has been higher than average and in bubble mode since the early 90's, yet even after this meltdown we're way higher.

What I think we need to focus on are the types of events or bubbles that can bring down the financial system. This has to do with leverage and allowable risks to our banks. The dot com bubble hurt, but wasn't as damaging as this crisis because banks didn't stand a chance of going under, they were not exposed enough to the bubble to cause a financial system meltdown. However banks are tied to real estate in a much great fashion, here is where a bubble can do great harm.

In the future, we have to make sure leveraged firms don't have their eggs in one basket and that not all firms that are leveraged are exposed to the same risks. Should all banks start lending out cheap money for margin accounts tied to gold, then the price of gold would have a great impact and could cause a crisis like this one. It's the banks and the leverage that is the problem. If we can eliminate the risk of many banks going under at the same time, then we've solved the problem, crises will no longer be as severe as this one.

Large banks should have higher capital requirements, and lower leverage allowances. Smaller banks will have looser requirements, but the regulator needs to see if they are all betting on the same thing and if that poses a danger to the entire system should the bet turn out badly.

Almost forgot, bubbles are almost always the result of easy credit. Bubbles can't form without credit, in every case I can think of, credit was the hidden accomplice, perhaps even the mastermind that causes bubbles. No credit, not enough "fuel" for a bubble to develop. I think we're seeing a lot more bubbles recently because the FED just will not allow credit to contract, they keep on trying to reinflate the bubble, even now there are calls for more loans and credit to be made available. I think the FED's monetary policy is severely flawed, the default rate in normal times is too low and they refuse to tighten until its too late due to pressure to allow good economic times to continue (the economy is always referred to as bad, no matter what, even when we had below 5% unemployment in order to create pressure for more rate cuts). The FED has to break the cycle or we'll have another bubble shortly, the aftermath of reflating the housing bubble.

Creating Government Jobs Through Stimulus

2009-10-24T05:00:00.000-07:00

The problem with government job creation is that most are hired on a permanent basis. Union rules either prevent layoffs or make it extremely costly due to buyout provisions and similar measures. Since government jobs are not downwardly elastic, over-hiring beyond the optimal level required to provide services would represent a persistent burden long after the stimulative effects are no longer needed. That would hamper recovery and stifle economic growth.

Why? Because these jobs have to be paid for and so eventually higher taxes will have to be levied to pay for the extra government employees. Most state governments must run a balanced budget and can't run long term deficits, and the federal government which can, must eventually pay back the debt with interest. Even assuming some debt never has to be paid back, the federal government still has a market imposed debt ceiling beyond which it becomes increasingly more difficult and costly to finance.

It's the stickiness of government jobs that has to be taken into consideration. An increase in taxes has a negative effect on the economy, and because the outlook for the budget looks so bad already with total debt increasing faster than GDP (thus an increasing debt/GDP ratio) for the foreseeable future, there simply isn't any room for more.

As with any spending, the issue of value is important. Excess government jobs provide very little value, some of the worst bang for the buck available. Mish, I think, has a very credible analysis on the issue of "wasteful" stimulus, though the quote below is from HB.

http://globaleconomicanalysis.blogspot.com/2009/10/us-faces-second-lost-decade-because-of.html

"In reality, the entire inflationary mini-boomlet-within-the-depression was simply an illusion. 'GDP growth' that is bought with monetary pumping and feckless fiscal spending only misdirects and ultimately consumes even more scarce capital.

Fiscal stimulus may temporarily give the impression of a recovery, but it is not a genuine recovery. It makes things worse. The moment the pumping is abandoned, the true state of affairs is simply unmasked. That is what happened in 37/38 - a slight tightening of monetary policy revealed the fact that the mini-boomlet was as unsound as its predecessor boom in the years prior to the '29 crash."

In theory, these recessions and depressions happen because of mis-allocated resources. Mis-allocating more resources will only prolong the recession, not make it better. We need to allocate resources to productive uses, in other words, hiring people to dig holes and fill them up again just to create jobs isn't going to get us out of recession. As soon as the spending stops and the workers are laid off, we end up back where we started, but on even worse terms because of the added debt required to pay for those workers in the first place. Value seems to be the most important aspect missing from the discussion.

Why are conservatives seemingly anti-government?

2009-10-15T21:36:00.000-07:00

It's not that the government is always the bad guy. It's that the government is run by people, just like corporations are, and people can be good or bad. What matters is the checks and balances to make sure power isn't abused and that people are working towards the right goal in an efficient manner.

Businesses are checked by the necessity of making a profit, and a profit in economic terms means they are providing a good or service society wants and generating gains for society in aggregate. Should they abuse or scam customers beyond the good they provide to those customers, they simply will not get enough business and they'll go bankrupt. Plus there are government agencies and laws to watch over the conduct of corporations. Yes definitely government is needed as a check to businesses beyond "market forces".

But who checks government power? Conservatives believe that government is the greater danger because it has more power and fewer checks. Government also isn't subject to being checked by market forces, government agencies don't have to offer good service or generate surplus to society. I think the tea parties and the huge march on Washington we saw was concern over the powers government is reserving for itself and the lack of enough checks to that power. Government can make laws and send people to jail, it can tax and take wealth away, it can affect people's lives a lot more than corporations can. No corporation can take away more wealth than I'm willing to give away, I can always end service, but I can't opt out of taxes or end the services government provides without moving out of country and renouncing my citizenship and utterly giving up my live as I know it.

The Biggest Difference Between Liberals and Conservatives

2009-10-15T21:35:00.000-07:00

I think the biggest difference between conservatives and liberals are that liberals always assume their intentions will work and without any other negative consequences. They ignore or don't pay attention to the details of implementation and execution, but rather focus on the overall intent and focus.

This consumer protection agency is a good example. Liberals want someone to protect ordinary people from the abuses of corporations and others who might want to take advantage. I don't think anyone is against that goal, but HOW EXACTLY is this consumer protection agency going to function, what are its powers, and how are they going to implement their goals? Who will run it and who will have oversight?

I find that liberals don't concern themselves with those details, furthermore they trust and assume that the agency will be infallible and run as it was intended to. Conservatives are much more skeptical, focus on the unintended consequences, and point out that any agency is staffed by people and people are fallible. Depending on the system and the checks and balances, people can be darn right incompetent or a number of things so it can't be assumed this agency will do what it was intended to do.

Is Obama a Natural Born Citizen?

2009-09-19T01:18:00.000-07:00

After further research, as currently interpreted, Barack Obama is a natural born citizen of the United States. The Supreme Court refused to take up the issue meaning that they let the current interpretation stand. Had they found error in the current interpretation, the Supreme Court would have taken the case.

Both sides have arguments that support their case for what is a "natural born" citizen, but under current convention, a natural born citizen is a person born in the United States or a territory thereof. Regardless there are more ways to show that Obama is a natural born citizen.

Quote:

The United States has always had two principles that determine if a person is born a citizen of the

United States

.
… the United States recognizes the

U.S.

citizenship of individuals according to two fundamental principles: jus soli (right of birthplace) and jus sanguinis (right of blood). From the office of Citizenship and Immigration Services

Quote:

he term jus sanguinis describes a person born of parents who are citizens and jus soli describes a person born in the country. Persons who are born only under the principle of jus sanguinis are called a “consanguineously born citizens,” and their claim of citizenship is based on inheritance. . On the other hand persons who claims their citizenship based solely on the principle of jus soli are called “native born citizens” and these persons’ claims are based on the geographical location of their birth. Both principles are equal in making one a born citizen. Being a born citizen extends to them one particular immunity not given to naturalized citizens, in that born citizens are immune from involuntarily renouncing their citizenship. A naturalized citizen can have his citizenship revoked for several reasons, but under current law, born citizens must walk into a US Embassy abroad and in front of the Consul renounce their citizenship.

I take the above quotes from The Birthers website which disagrees with me to make a point. First, Obama is defined as a native born citizen by the Birthers, meaning that he cannot have his US citizenship revoked, or lose it by involuntary means, he MUST renounce his citizenship in front of an Consul in an US embassy to lose his citizenship, he can't lose it by any other means.

Secondly, Barack Obama does qualify under the definition of natural born the Birthers uses. Barack's mother was an US citizen, that gives Barack US citizenship by jus sanguinis (blood). All it takes is one parent to be an US citizen to automatically give you US citizenship regardless of where you are born. Marriage does matter as well as residency periods, however it seems that Obama's mother did qualify.

Quote:

Section 309 of the INA [8 USC § 1409] grants US citizenship at birth to an "illegitimate" child if his/her American mother had previously spent at least one continuous full year in the US.

So if Obama was born on US soil in Hawaii, then he would have a claim to citizenship on both principles of jus soli (right of birthplace) and jus sanguinis (right of blood). That would clearly make him a natural born citizen by even the standards of the Birthers and all dissenters. Furthermore, whatever he or his parents did in scamming/getting an Indonesian passport or whatever, Barrack cannot lose his US citizenship without renouncing it in front of a consul inside an US embassy. Doesn't matter how much he lies about his citizenship to gain college funding, he has to renounce it formally.

I hope I've shown logically that Obama does qualify as long as he was born on US soil, and there's no proof that he wasn't. If that's your only hope, I would abandon that hope immediately. The FBI is supposed to vet any candidate for presidency, maybe it's too much for me to assume, but I assume they checked the long form birth certificate and would have said something if the certificate shows anything other than US soil for Obama's birthplace. We can be almost certain that Obama was born on US soil. Why? Because people have seen it and the form WILL BE released sooner or later. I don't think the people would be this sanguine if they knew that in 20 years or so, the country would find out that they deceived the nation and violated the Constitution. So why doesn't Obama release the long form? Because this makes opponents look stupid and why take away the rope if your enemies are hanging themselves? He's going to give you guys all the rope you want.

Obamacare

2009-09-19T01:15:00.000-07:00

Health care is a very difficult issue because Americans expect that everything will be used to treat their illness without regard for costs. It makes sense, everyone values their own life a great deal and want all possible treatments and methods to be used to help cure their illness or extend their life. But that costs a lot of money.

Take this example. A person has cancer that is at a stage where 80% of people die within a year. Further treatment will cost $50,000 a month, is it worth it to continue treatment? In the US, there is no one who can say no. The insurance company might try, but laws prohibit denial of coverage because "it's not worth it". And of course the person who has cancer is going to say of course it's worth it, any amount of money is worth trying to save my life.

In Europe, the government decides, which would also happen here if Obamacare passes. Someone has to decide if spending X money is worth an X percent chance of extending a person's life. Otherwise, we get huge costs because we try to do everything possible to extend a person's life regardless of the cost. That's why health care is so expensive in this country, that and the fact that we do have the best care in the world. Recent studies have finally provided evidence for what I've suspected all along.

http://papers.nber.org/papers/w15213#fromrss

Quote:

Life expectancy in the United States fares poorly in international comparisons, primarily because of high mortality rates above age 50. Its low ranking is often blamed on a poor performance by the health care system rather than on behavioral or social factors. This paper presents evidence on the relative performance of the US health care system using death avoidance as the sole criterion. We find that, by standards of OECD countries, the US does well in terms of screening for cancer, survival rates from cancer, survival rates after heart attacks and strokes, and medication of individuals with high levels of blood pressure or cholesterol. We consider in greater depth mortality from prostate cancer and breast cancer, diseases for which effective methods of identification and treatment have been developed and where behavioral factors do not play a dominant role. We show that the US has had significantly faster declines in mortality from these two diseases than comparison countries. We conclude that the low longevity ranking of the United States is not likely to be a result of a poorly functioning health care system.

Insurance can't get around the fact that SOMEONE HAS TO PAY! Just because you have insurance and only pay $10000 for $100,000 of health care services doesn't mean the $90,000 disappears! Someone else will have to cover that shortfall. So insurance cannot possibly work if everyone is receiving $100,000 of services for premiums and copays that add up to $10,000. It means that those who don't get sick and have insurance will see premiums that seem very high to them. Again, someone has to make up the difference, someone has to pay. This is what makes health care so difficult to "fix".

And of course there are government regulations and such that prevent health insurers from offering coverage across States, which could reduce risk for the insurers and rates for everyone else. The larger the pool, the easier it is to predict outcomes. Also why do Americans require that doctors treat them or be the primary person to see them? Most illnesses and sicknesses are common ones that we know about and know how to treat. A nurse can be just as effective, let's say stitching up a cut or treating an infection. Doctors could then be reserved for only the most difficult cases, this is what they do in the UK. You don't get to see a doctor unless the nurse doesn't know what is wrong with you and can't fix you up. That saves money, but would Americans be satisfied with that kind of health care? Maybe, read on below.

Quote:

WSJ -- Retail health clinics are adding treatments for chronic diseases such as asthma to their repertoire, hoping to find steadier revenue, but putting the clinics into greater competition with doctors' groups and hospitals.

Walgreen Co.'s Take Care retail clinic recently started a pilot program in Tampa and Orlando offering injected and infused drugs for asthma and osteoporosis to Medicare patients. At some MinuteClinics run by CVS Caremark Corp., nurse practitioners now counsel teenagers about acne, recommend over-the-counter products and sometimes prescribe antibiotics.

Walgreen, the second-largest pharmacy chain by stores, plans to start a pilot program for managing diabetes in coming months. CVS's MinuteClinic is piloting a rapid test for conjunctivitis, or pinkeye, at its Atlanta clinics and working with the Cleveland Clinic to provide care to asthma patients.

MP: So how are the MDs responding to the increased competition from retail clinics? First of all, they don't like the competition:

Such moves (expansion of services at retail clinics) are raising the ire of physicians' groups that see the in-store clinics as inappropriate venues for treating complex illnesses. In May, the Massachusetts Medical Society urged its members to press insurance companies on co-payments to eliminate any financial incentive to use retail clinics.

But second of all, they are responding to the competition from retail clinics by acting more competitively themselves:

The clinics are helping alter the practice of medicine. Doctors are expanding office hours to evenings and weekends. Hospitals are opening more urgent-care centers to treat relatively minor health problems.

California Roll Factory Review

2009-09-19T00:20:00.000-07:00

Four or five stars? I decided on five because what California Roll Factory does, it does very well and occupies a much needed, but often neglect\ed segment of the sushi restaurant world--the value segment.

If you are looking for the tastiest, best fish and exotic seafoods handpicked by the sushi chef in the morning, you've come to the wrong place. As mentioned, this is the place for rolls, and you'll find plenty of these in unique and esoteric combinations. Can't find the combination you want or have a great idea for a roll that you're sure will take the culinary world by storm while in a drunken yet contemplative state? Just tell the sushi chef what ingenious madness you've come up with and he'll make it. You even get to name it and have it put on the menu if it proves popular enough. That's how most of the hundreds and I mean hundreds of available rolls end up on the menu.

I've yet to see another sushi restaurant has the same concept, let customers invent rolls, put it up on the walls and whatever sticks, sticks.

However that alone won't get five stars in my book. The reason California Roll Factory gets five stars is not only due to the unique concept, but because it offers a lot of sushi at a good price, In other words, it's a good value and that deserves merit and stars--five to be exact.

California Roll Factory doesn't skimp on the fish, I am continuously surprised at how much fish ends up in the rolls, when you order something with tuna and salmon in a roll, they don't cut out half of the fish to make it the same quantity as you would get if you ordered a simple tuna roll. No, they just make the roll bigger, and so when you have multiple ingredients, the rolls get huge, so large that it would take considerable skill to fit a piece in your mouth. Yes of course sushi is meant to be bite sized, but CRF doesn't pretend to be a traditional Japanese sushi restaurant and so doesn't care about the usual rules of sushi. I'm sure some of the combinations would horrify a traditional sushi chef, no this isn't your top level elitist sushi place where you can get kicked out for requesting watsabe on the side (such dictator-style sushi places are the fad in New York now, since the sushi chef already puts watsabe in the sushi, of course he'll kick you out if you ask for more since that'll destroy the perfect sushi he's created for you).

It's not a top quality, expensive sushi place and doesn't pretend to be. Instead, it is a California-Japanese fusion sushi restaurant offering loads of average quality sushi (but in unique and creative ways) for a cheap price. Not all sushi places need to be the ones that fly in fish from Hawaii every morning and offer only the very best fish. There definitely should be a category of restaurant that offers good value and good fun. California Roll Factory fits that segment and dominates like Wal-Mart does the cheap retail market. Not all of us can afford top quality sushi, nor do we want to spend that much money all the time. Sometimes, especially when you're drunk, you just want A LOT of good but not great sushi at a price that you won't regret the next morning when you get sober. For those who find themselves in that situation, California Roll Factory is the place, five stars for sure.

Review for Yelp

Musings on Debt as Money

2009-05-18T21:43:00.000-07:00

In the United States, all of our money is government debt (Federal Reserve Notes). Without government debt, we would have no money, the entire system is dependent upon debt and the creation of more debt to increase the money supply. Anytime the FED wants to increase the amount of Federal Reserve Notes outstanding, it purchases US Govt. Bonds. Under a situation where the government runs a surplus and reduces the national debt to a point where it doesn't need to issue bonds (Greenspan talked about this during the late 90's) the FED's ability to increase money supply would be severely hampered. It could purchase private bonds, but that too is debt.

Now that I think of it, this sort of makes sense. What are save, we are shifting consumption to the future. Our ability to consume more in the future must be met by someone else's obligation to forgo their future consumption. That obligation can be called debt. So money is a form of savings, it makes sense for that savings to be in the form of someone else's debt.

The current global monetary system is a very new invention. It was created only during the 1970's! Before then, we had the Breton Woods system whereby the dollar was linked to gold and everyone else linked to the dollar. So it was still a gold based system, though a weakly linked one.

Is this system sustainable? There seems to be a free lunch inherent in this system. In theory, money supply has to increase as the GDP increases (output). Government can get a free lunch by creating debt, which is money they can use, and that debt never has to be paid back because it is circulated as money.

Now since the dollar is the world's reserve currency and therefore is essentially the money of the world, the United States can get a free lunch by creating debt, monetizing it, and then exporting it overseas to fill the world's need for more money as world output expands. That debt never has to be paid back, those dollars, which is our debt, circulates as money. As long as the world continues to expand output, they will need more and more money, allowing us to create more and more debt which circulates as global money.

Would this system collapse if the dollar were no longer treated as global money?

Securitization and Conspiracies

2009-04-10T04:01:00.000-07:00

What the financial system does is match savers with borrowers, that's all in the grand scheme of things. That simple task is actually quite hard, just as matching two people in search of love is very hard.

The point is that there is no conspiracy or Illuminati behind the scenes pulling strings. All the credit derivatives and other tools are there to help money from savers flow to borrowers. Of course each saver has his own risk tolerance and most people don't have the time to check out every potential borrower for credit worthiness. That's why we pool savings together into banks, who vet the borrowers, or purchase bonds through mutual funds who also do research.

Securitization splits risk into different sections so that money from low risk savers can still find its way to high risk borrowers. It is a tool and is incredibly useful. Before, a high risk borrower like GM needed to find a high risk saver willing to lend at appropriate yields. Now, GM's debt is bundled, maybe with other companies, and then chopped up so that grandma's savings can be used to purchase senior tranches which are much less risky than whole GM bonds.

The problem wasn't securitization or chopping up debt. It was that the tranches were mis-priced and mis-allocated. Turns out that not as much of the bundle can be treated as relatively safe. Instead of 92% of a bundle being AAA, more like 88% is or something like that. Once more data is collected, the system will work better, but one thing is for sure, we'll never go back to life without these tools. That would be stupid. Just because a madman like OJ Simpson used a knife to kill two people doesn't mean the rest of society will stop using knives. Securitization is here to stay and it's not a conspiracy or some trick. It's just a tool to allow savers to lend to borrowers

Regulations and Ratings

2009-03-27T16:49:00.000-07:00

The real problem was that there wasn't enough data for the Ratings Agencies to make ANY determination for the credit worthiness of these securities. The Agencies had decades worth of data that allowed them to rate corporate and governmental bonds with at least some semblance of accuracy. However, the new stuff was too new to have enough data on.

A honest assessment would have been to say that no rating could be given on any of these new products since the data needed to make a fair rating did not exist. Instead, new models based on in-house theories were created just so that ratings could be generated. Of course these model, devoid of real data and real tests, failed.

Another honest assessment would blame the regulations ALREADY in place for making ratings such an important factor in firms' capital requirements. REGULATIONS treated AAA rated bonds differently for capital requirements, they also restricted purchases by certain institutions to only investment grade bonds and such. Furthermore, competition was essentially eliminated as only a few approved agencies were allowed to make these all important ratings.

For those who don't follow the capital markets, it should be noted that the market never treated the new AAA rated securities the same as the old school AAA rated bonds. The new AAA stuff always carried a higher interest rate, and the spread grew as the ratings dropped. An A rated security of the new type traded WELL below (it carried a higher interest rate) an A rated old-school bond.

The only people who didn't seem to get it were the regulators themselves, everyone else knew that the new securities weren't the same as the old securities. AAA did not equal AAA! However the regulators failed to pick up on the HUGE hint the markets were giving and continued to allow the new AAA stuff to be treated in the same manner as the old stuff for regulatory purposes. Had they been as wise as the "market", then they would have adjusted their regulatory requirements and we would not be in this mess today. Again, this was clearly a failure of existing REGULATIONS! REGULATIONS stated that AAA capital was to be treated differently, REGULATIONS gave banks the incentive to hold AAA securities, REGULATIONS gave monopoly power to a select group of favored agencies. Ratings agencies are able to play this game because there is no other competition, it doesn't matter if they are terrible or not as long as the good ol' boys are all equally terrible. They are also insured of business because banks and other institutions MUST get ratings for REGULATORY purposes.

Don't tell it's a lack of regulations when it was the poorly crafted regulations in place that caused this mess. And now you're telling me all we need are more of the same crappy regulations to solve the problem? Give me a break, when will you people realize that regulations hardly ever work in the manner they're supposed to? There are always unseen and unintended consequences! Yet you all pretend that government can craft a perfect regulatory system when it has never been able to in the past!

I will repeat, no matter what regulations get put into place, we will have another financial crisis sometime in the future. The government, nor any entity, has the ability to create a foolproof, perfectly working system. Are we still on the Aristotelian model of perfection that cannot possibly exist in the real world? How many thousands of years are needed for people to learn?

Globalization and the Loss of Manufacturing

2009-03-16T16:02:00.001-07:00

Globalization leads to wage equalization, the process isn't always going to be smooth, but I believe it is unstoppable as industrialization was.

We still manufacture a huge amount of goods, it's just that these are post-modern goods and are not tangible. One of the biggest problems is that the rest of the world has not yet caught up in terms of legal protections and enforcement. In America, we already have all the material things we need, we no longer buy clothes to keep us warm or shoes to protect our feet. We buy stuff now to express ourselves and to show our social status. Even cars are bought for "style", not to mention Iphones. Especially if you're in the entertainment industry, you must have a "cool" phone like the Iphone or else you'll be looked down upon and snubbed.

Manufacturing generic tangible goods is yesteryear's industry. As the world gets richer, someday everyone will have enough tangible goods they need purely for functional means. But humans will always need more entertainment and goods that convey social status, which is what we're manufacturing today. What we should do is make sure these goods are protected, a worldwide framework has to be formed and implemented that will pay the manufacturers of these goods for their work. Pirating is a huge problem, as big as it was during the 1600-1800's. We have countries like India who outright steal what we produce, like our medicines. China does not take pirating very seriously, but even countries like Sweden don't either. The EU is a hotspot for well to do pirates to congregate and enjoy the spoils of their theft. That has to be stopped.

I suggest people focus on the future instead of the past. Fighting a battle to preserve an obsolete industry is foolish. We should all be fighting to establish a framework for the new post-modern manufacturing industry instead. That would create a lot more jobs and raise wages substantially NOW. Think what would happen if all the trillions that is being stolen were to flow back into this country, the crisis would be solved and the nation would prosper.

Rich Are Paying Their Fair Share

2009-03-14T04:51:00.000-07:00

Carpe Diem neatly summarizes, "...the income share of the top 1% increased by about .55% per year from 1986 to 2006, compared to the tax share of the top 1%, which increased by about .75% per year."

Bottom line is that the rich are paying more than their fair share.

CARPE DIEM: The Increasing Tax Share vs. Income Share Gap

On Immigration

2009-03-14T04:32:00.000-07:00

As an immigrant myself, I find that there is very little opposition or hostility towards legal immigrants. This country is quite welcoming towards immigrants who want to stay here and are invited to.

As a legal immigrant, I also oppose illegal immigration and want the immigration laws to be enforced. Some of my family members recently immigrated legally into the United States after waiting 11 years. That is a long time to wait and I resent that those who unfairly cut in front of them are grouped into the same category. Both of my cousins who came with my aunts and uncles are now in the University of California system and will be productive members. All of my uncles and aunts are working legally and taking English classes, which they began well before they received permission to enter the country. None are on public assistance.

Yes there is a huge difference between legal and illegal immigrants and I resent being lumped into the same category. It makes no sense to do so, just like lumping in chronic drunk drivers with those who have had a sip of alcohol within the past year. Society's anger is directed towards drunk drivers who cause accidents, not all people who have had a drink at some point. The same applies to illegal immigrants.

Against the Stimulus: Examples of Pork

2009-02-15T17:13:00.000-08:00

Huge amounts of pork is the main reason I and others are against the stimulus. I have repeatedly said in prior posts that I support a stimulus bill as long as the money is used wisely. There is far too little going into infrastructure and improvements that will net a gain for society in the long term. And the infrastructure spending itself is questionable.

For example,

"For an amount for "Broadband Technology Opportunities Program", $4,700,000,000: Provided, That of the
10 funds provided under this heading, not less than
11 $4,350,000,000 shall be expended pursuant to division B
12 of this Act, of which: not less than $200,000,000 shall
13 be available for competitive grants for e:A.1)anding public
14 computer center capacity, including at community colleges
15 and public libraries; not less than $250,000,000 shall be
16 available for competitive grants for innovative programs
17 to encourage sustainable adoption of broadband service"

"For an amount for "Digital-to-Analog Converter Box
17 ProgTam" , $650,000,000, for additional coupons and re18
lated activities under the program implemented under sec19
tion 3005 of the Digital Television Transition and Public
20 Safety Act of 2005: Provided, That of the amounts pro21
vided under this heading, $90,000,000 may be for edu22
cation and outreach, including grants to organizations for
23 programs to educate vulnerable populations, including sen24
ior citizens, minority communities, people with disabilities,
25 low-income individuals, and people living in rural areas,..."

People should go read the first few pages of the text where i got the above spending from. The link is below, if the rest of the 1000 page bill is as filled with crap as I suspect it is, this does not qualify as a wise use of funds. I skipped over the first few pages which was more subsidies for farmers, and a large amount of spending seems centered on construction of government buildings and improvements to government buildings housing already bloated administrative agencies. Giving government workers a nicer workspace doesn't seem to have much long term value for ordinary citizens. And you see that millions are routinely allocated to "outreach" programs through private sources. In other words, $90 million will be used to advertise that there is money for people who want to get the digital converters. $650 million is allocated to purchasing new digital converters! I haven't mentioned either the billions for more food stamps and WIC which already has so much money that they have to advertise to encourage people to sign up for food stamps so that they can spend all the money they're currently given. Come on people, this is obvious waste.

$250,000,000 for programs that will "encourage sustainable adoption of broadband service"? Let me translate, $250,000,000 will be given away to special interests who will set up some fake program to waste the money that they don't steal. The best way to get more affordable broadband is to encourage competition, allow telephone companies like Verizon to offer DSL wherever they want instead of having to apply for licenses from States and local governments. Of course cable companies are fighting tooth and nail to prevent more competition. I found all of this just within the first few pages..., think of what the rest of the bill contains!!!

http://www.house.gov/billtext/hr1_legtext_cr.pdf

The Road Ahead

2009-02-07T02:49:00.000-08:00

The more I dig into this, the more I realize that there is no easy way out. Recapitalizing a worthless bank pretty much guarantees a loss for the taxpayer. The taxpayer will have to eat the losses first just to get the bank back up to $0 book value, then pump more money in to move equity into positive territory. Now the taxpayer could make that money back in the future, but that's far from assured, what's clear is that the taxpayer is "overpaying", which is why private equity doesn't step in right now.

We have to figure out a way for taxpayers to be able to make money through future profits or a future sale. However, we also don't want government to run the bank because government is terrible at running things and politics would enter into the daily operations of the bank. If only we could trust that politicians wouldn't interfere but we know they will by demanding loans to "low income" borrowers (translation: ultra-high risk subprime borrowers) and to forgive outstanding mortgages in default. That means more bad loans will be made and the nationalized bank will face insolvency again a few years down the road, the crisis will be prolonged.

That's why we have very little choice but to use taxpayer money to recapitalize the banks while still making sure they are in private hands. The government can and SHOULD demand changes to the Board, but only qualified bankers should replace those ousted, please no more political hacks like Daschle, maybe someone competent like Warren Buffet would take the job as a service to the country. The Board would decide on a new CEO, again with the sole focus on competency and profitability. That might mean financial sector employees further down the ranks would be promoted or given the CEO job. Again, there will be the usual cries of enriching Wall Street, but only people with banking experience can be expected to run a bank. Those calls will have to be ignored and Obama will have to use his golden voice to explain that to the public. Obama will lose favor with the leftist extremists who are out of touch with reality, and be called just another Bush. He will have to take the criticism for the sake of doing what's best and hopefully he will be able to articulate why only Wall Street people are being given CEO jobs. A tough task lies ahead.

Newspaper Reform

2009-01-12T04:12:00.000-08:00

Newspapers should stop devoting resources to cover news conferences on the national level, instead get the wire, the people who call news conferences will never answer any real questions anyway so it’s useless to send a reporter to take notes on a prepared statement. Use that reporter to write an in-depth story that explains the situation in detail. Have the reporter do investigative research, research WILL be necessary!

The entire model has to change. Readers already know what the “news” is, they hear about it or read it online well before the print edition comes out. That means the print edition offers stale “news” that we already heard. What we need is a comprehensive and detailed analysis that can’t be offered by online sites and radio news summaries. The routine stuff like Obama says “x” should be printed from a wire service or a pool of reporters. No way should a reporter from every paper be sent to take dictation.

Local is important, but again, it has to be investigative or in-depth. No more blurbs or summaries, those are already available for free and if newspapers want to publish that, then just get it from a wire service, there’s no need to assign a writer to summarize what we already know.

Stop the obvious biased slant. In other industries, the customer is always right. It doesn’t matter if you think you’re biased or not, if the reader thinks so then you have to change. The readers’ opinion is all that matters so it’s time to change the writing/writers until the readers feel the paper is no longer biased. Many say the biases are cultural and ingrained within the newroom. If so, then perhaps the entire staff has to be fired and replaced over time. Because we all tend to hire people who are similar to ourselves or who we can identify with, this may not be possible without firing all the staff at one time and starting over. Yikes.

Obama Offers Conservatives Hope

2009-01-02T17:20:00.001-08:00

Does it seem disquieting to anyone that Obama seems to be "staying the course" with respect to overall foreign and domestic policy? I commend Obama for using his brain and continuing the policies that make sense and are best for America.

Look at Obama's choices on the economic front. Romer, Summers, Geithner, and Bernanke to continue in his current role. These are incredibly sensible and wise choices that have to make any liberal angry. If Republicans had to choose among Democrats, they would not be able to come up with a better slate. Volker is also well liked among Republicans and he will continue to advise Obama. This is the sort of change that will make Obama into a good president, changing the Democrats into a party that focuses on efficiency and regulations that work without imposing massive burdens.

On the foreign policy front, Clinton is a hawk within the Democratic party and Obama even more hawkish. I can't distinguish Obama's foreign policy from that of McCain, other than Obama seems willing to invade and bomb Pakistan while McCain is more dovish.

Again, it seems that the image Democrats have of Obama is different than the one I'm seeing. There hasn't been any indication that Obama would be the radical that destroys America as we know it. He seems smart enough to pursue wise policies and has done a great job in recruiting smart, experienced Cabinet members that will continue the good policies of the past.

Bush was an incompetent manager. It wasn't that all his policies were bad, especially on the foreign policy frong, it was that they were all badly executed. With a competent person behind it all, we could see great gains. We needed a change in quarterbacks, not gameplans. The gameplan remains solid as ever, but the right quarterback can make the difference between a pitiful looking team and a Superbowl winning team.

So when Krugman looks out and sees a radical change, he's imaging things again. Yes the outcome can be very different when incompetence is replaced; a football play can look ugly if executed badly, yet be a thing of beauty when executed as planned. Obama could be the perfect quarterback for our Run N' Shoot offense.

Regulations Caused This Crisis

2008-12-24T16:54:00.000-08:00

If there is one thing we should learn from this crisis it is the danger of bad regulations and the unseen danger of unintended consequences. The Basel II regulations put a lot of power in the hands of the ratings agencies. These agencies are the only ones allowed "in the game" by law, I'm talking about S&P, Moody's, etc. Go to the link below for the full list of ten.

A Nationally Recognized Statistical Rating Organization (or "NRSRO") is a credit rating agency which issues credit ratings that the U.S. Securities and Exchange Commission (SEC) permits other financial firms to use for certain regulatory purposes.

http://en.wikipedia.org/wiki/Nationally_Recognized_Statistical_Rating_Organizations

Thanks to the REGULATIONS we ALREADY HAD, financial institutions were eager to separate their subprime debt into AAA securities and left over toxic waste. Unfortunately, those AAA securities weren't as safe as the ratings agencies said they were and became toxic themselves.

Regulations made a protected cabal of agencies free from other competition. Regulations allowed these agencies to affect the capital requirements of large financial institutions. AAA securities count toward capital more than BBB securities under Basel II.

Regulations caused this financial mess, they set the stage and regulators who were supposed to watch over the system failed to do their jobs.

Let's not pretend there were no regulations. The regulations we had didn't work. Government plans and wise thinking failed and turned out to be very stupid instead of wise. This is just another example of government failure and why we should not put our faith in government. Anyone who looks at the facts and past history can see that the government's record is incredibly poor, the government is incredibly incompetent no matter what party is in power. And for those who believe in the superiority of international regulators, Basel II was push upon us by "the international community". Below is an article with links to other articles.

http://www.allbusiness.com/government/government-procedure-lawmaking/7503196-1.html

The long-awaited implementation of the Basel II capital adequacy accord has been further threatened by US concerns over the results of the recently completed quantitative impact study (QIS4). The four US federal banking agencies (OCC, Federal Reserve, FDIC and OTS) have called for a delay in publishing an important notice of proposed rulemaking (NPR), from the summer to the autumn this year, to allow for further study.

The Calpers Scam

2008-12-23T04:21:00.000-08:00

Calpers in recent weeks said it expects to report paper losses of 103% on its residential investments in the fiscal year ended June 30. That's because Calpers invested not only its own money, but billions of dollars of borrowed money that must be repaid even if the investment fails. In some deals, as much as 80% of the money invested by Calpers was borrowed. ...

read the rest

Mish's Global Economic Trend Blog sums it up

The Calpers website fails to point out just just how it guarantees those benefits. The WSJ article spells it out nicely: "California's cities, towns and schools may have to cough up more money to cover the retirement and other benefits the fund provides for 1.6 million state workers."

What a scam.

Stimulus Should Not Depend on Health Care or Alternative Energy Invesments

2008-12-23T03:36:00.000-08:00

There have been calls for Universal health care and green energy investments as part of a stimulus package. Universal health care and alternative energy are not going to be the paths that lead us to prosperity. There is no free lunch, if the government mandates the price of health care, then quality or supply must decrease. How many people will want to become doctors if they can only make $50,000 a year? Maybe the dishwasher today, but certainly the quality of the medical staff has to decrease. And why would anyone build hospitals or enter the health care industry with prices capped? They would find more productive uses for their capital, it just doesn't make sense. As for alternative energy, there is a cost, literally since it costs several times more than oil. That means Americans will have to spend more money to heat their homes, run their cars, and watch TV, leaving less for everything else. We will be poorer as a result, the stimulus from building wind and solar plants will be one time events. Plus would people be willing to pay more than double for alternative energy when they can get fossil based energy at less than half of alternatives? No, otherwise we'd be building a lot more wind and solar plants. We aren't because the demand isn't there, they aren't competitive, only government mandates are propping up these investments and that raises energy costs for Americans. You can't have it both ways. It's time to separate leftist dreams from real solutions. If you must, play a computer game where wind and solar are less expensive and no one wants to use oil. Actually, this idea is so ridiculous that I'm not aware of a game that operates under that reality.

Defending the TARP's Execution

2008-12-21T04:41:00.000-08:00

Below is my response to Alan Blinder's Op-Ed in the New York Times.

The original plan was abandoned because 1) there isn't enough money to buy all the toxic securities out there 2) Since these securities are non-standard and have various structures and terms, buying them through an auction would be a difficult and time consuming process 3) buying securities at market value would expose many banks as being insolvent or below regulatory capital requirements 4) it would be hard to limit purchases to US banks, we would in effect, have to buy all the toxic stuff in the world, how do you prevent foreign banks from selling toxic assets to US banks so that they can be sold to the Treasury? 5) Now you know why there isn't enough money.

The author is indeed dazed and confused. The terms of the capital infusions were favorable because the banks are in trouble. Predatory terms, as with the initial AIG deal, would have been too onerous. Banks need to make money so that they can use the earnings to write off their bad loans, if Treasury takes all of the earnings or even most, then it will take more time for the banks to get better. The whole point of a "bailout" is to HELP, not put banks out of business, thus the 5% preferred shares. And as for non-voting shares, it allows room for private equity investment as it leaves control to the private sector and minimizes government interference on the Board. Furthermore, preferred shares eliminate the need for the government to find people to run the companies they invest in. There are too many companies, and Treasury or FED are ill-equipped to run dozens of companies. Who are the heads to report to? Who will call the shots? Paulson has enough on his hands and even he can't run dozens of separate companies.

Forget about stopping foreclosures, it's a foolish idea and would only prolong the crisis. Real estate prices have fallen so much that it's not possible anymore to pretend that they are anywhere near what someone in foreclosure paid for them. Thanks to that fact, there's very little incentive for a person to continue paying on a mortgage when he'll never see a penny from the eventual sale. Remodify the mortgage and he still has no incentive other than it allows him to rent the property. If rent is cheaper elsewhere, then he'll default again, why should a person pay extra for rent? And that house is, by all accounts, being rented since the mortgage defaulter will never see a penny of profit.

I'm glad Paulson wisely saw the above and chose the best course of action left to him. It's ridiculous to expect a quick or painless end to this crisis. Else it wouldn't be a crisis. There are no easy solutions. Whatever the criticism, the downturn will take its course and NOTHING can change the fact that the losses are real and have to be borne by someone. Nationalizing the banks would just transfer the losses to the taxpayer and cause panic in the stock markets. When government seizes private equity, then appetite for that equity disappears.

No Point In A Bailout For Auto

2008-11-20T23:24:00.000-08:00

There is no point in loaning the Big Three money unless they prove that they can continue on as going concerns. They currently lose billions per quarter, WHAT WILL CHANGE FROM A LOAN? If all giving a loan will do is allow them to lose money for a longer time, then there is no point in doing so.

I'm surprised that Congress asked some tough questions and got to the bottom line. What exactly will the Big Three do to change their circumstances? Don't tell me make more green cars, that's very poor thinking, they already make green cars like the Chevy Malibu and their hybrid SUVs. What matters is that those cars can't compete against the BETTER green cars of Toyota and Honda. Why buy a Malibu when you can buy a Civic? The Malibu is cheaper, but not cheap enough and they're as cheap as GM can go.

So basically the question becomes, how can the Big Three produce a BETTER small car than Toyota and Honda in the timeframe they have under a loan? The executives were vague because they know the answer is that they can't. They can't possibly make a better car and leapfrog Toyota and Honda in just two years or so. It takes that long just to come up with a new car, basically they'd have ONE shot to produce a car that would leapfrog Toyota's and Honda's new designs and that just isn't possible.

The Big Three can still survive, but not in their current form. They have to be allowed to downsize for real, that is close down whatever factories they need to and fire as many workers as they need to. THAT's the real solution, the long-term solution. From a SUSTAINABLE base, they can then start to improve on quality and expand. But they have no way of supporting their current structure, any money put in will just be lost.

GRE Scores by Major

2008-11-05T03:29:00.000-08:00

Thanks to Carpe Diem for the table. It doesn't surprise me one bit that public administration majors score the lowest, by a wide margin. This is yet another reason why I have no faith in government, bureaucrats are the dimmest, least capable people yet they're expected to make important decisions and regulate the rest of us all? Regulators need to be smarter and more informed than the people in the industries they regulate. Unfortunately, most fail those two requirements. True, top level decision makers aren't usually public administration majors, but the fact that only a government worker of some importance would bother getting a PHD in public administration and their obvious lack of talent scares me. And the second worst scores belong to education PHD candidates, again those looking for a career in government. No wonder our educational system is such a mess.

Sarah Palin's Record

2008-11-05T03:23:00.000-08:00

Actually, my friend pointed out that Palin is a strong fiscal conservative and has been since her first years in politics. The media has not presented her record in a comprehensive or fair manner. She did her best to cut spending and stand up to corruption and giveaways to special interests, and has been stronger as she's gained political experience.

Her views on gay marriage are EXACTLY the same as Joe Biden's and Obama's, check the VP debate. Republicans lost because they abandoned their principles and had nothing to run on. They couldn't run on fiscal conservatism and smaller government given their recent record. It's up to a new batch to present that philosophy to the American people, the current crowd just cannot be trusted or believed. Palin's social views are her own, but she will not run on those views if she expects to do well on a national level. All indications are that Palin is a fiscal conservative who is determined to fight and eliminate wasteful government spending. That's what will make her a star, that's what won election after election for the Republicans until they so violated their promises that they could no longer be trusted and were kicked out of government.

Obama Our President

2008-11-05T02:30:00.000-08:00

If this can move us forward significantly towards a colorblind society, then it is an achievement. However the future is in doubt more than ever before, liberal policies simply do not work. We have to hope that America can move forward and prosper despite those policies, and that Obama will not cater to the extreme left burdening us with more feelgood, but useless policies. What we need are prudent programs and policies, well crafted and effective. We can't afford more pork barrel spending and giveaways to special interests, voters want an end to wasteful spending for the sake of image and contributions. We need change in that respect.

Obama's acceptance speech was not encouraging, especially the remark about Wall Street prospering while Main Street doesn't. Main Street's wage stagnation is due to globalization, there are no simply and easy solutions to this, but over time, wages will begin to rise again.

At least foreign nations have reacted positively and America's image is better now than before. Obama has to use this goodwill wisely to strike a fatal blow to the Taliban. He seems willing. I don't think disengaging is even close to the best course of action. Letting Afghanistan go to the terrorists will cause trouble for future presidents and lead to a larger engagement for future generations.

We can only hope Obama will be a president in the mold of Clinton (personal issues aside). But Clinton was reigned in by a fiscally conservative Congress, I fear that there will be no brake applied here, who will make sure funds are spent wisely? Hope is irrational. Hope is all we have left.

Lack of Regulation?

2008-10-24T01:09:00.000-07:00

I don't know, we have dozens of government regulatory agencies with thousands of rules and regulations, yet somehow the entire financial sector was unregulated!

Face it folks, the regulations didn't work! The regulators were asleep! This is the problem with regulations and regulators, they often don't work and fail us!

What gave the ratings agencies the power to determine what securities are safe enough to hold in some portfolios?

Oh, regulations!

What made certain institutions purchase only assets that were deemed good enough by the ratings agencies?

Oh, regulations!

What gave these agencies monopoly power and prevented any other company or agency from entering into their business and offering better analysis?

Oh, regulations!!!!

And yet somehow there were no regulations and no regulators?

We have Greenspan's testimony, and somehow the government isn't involved in this crisis? It was a LACK of government? Gee, I guess Greenspan was never appointed by a government official or confirmed by Congress. He was never a part of the Federal government right?

Perhaps a better suggestion would be to craft regulations that work, cut the ones that don't, and be sensible instead of just screaming for more bad regulations.

Bad Journalism or Media Bias?

2008-10-22T13:37:00.000-07:00

An article by Reuters titled Middle-aged Women Drive Rise in U.S. Suicides shown on MSNBC.com highlights the problems with journalism today, and why the main stream media is dying. At best, this is incompetent and poor journalism, at worst it is media bias meant to sway the reader to a particular viewpoint.

First of all, is this rise a percentage rise or absolute rise in the percentage of people committing suicide? If we have 100 suicides and then next year have 102, that could be stated as a 2% rise, but the rise is actually negligible. What is the overall suicide rate in the US, interesting that the article doesn't mention this because we need a baseline to make sense of the situation.

This is a perfect example of crappy journalism and media bias. You MUST give a baseline or something we can measure suicide rates by in order for the reader to get some sense of perspective. These numbers, percentage increases, are meaningless without that base. I could say suicide rates doubled on my street corner, but that in itself doesn't mean much. If suicides were 1 last year and 2 now, then that's nothing, but if suicides were 50 on my street corner and now is 100, then we have a real crisis.

Why won't journalists do their jobs? Why do they keep on putting out crap articles that are meaningless and incomplete? A less thoughtful reader might be fooled or tricked into believing there is a real problem here. A smart reader understands no determination can be made due to lack of crucial facts deliberately left out. If they weren't deliberately left out, then the writer should be reprimanded for incompetence and bad writing. Such writers should be fired if they do it consistently, or even sometimes. My God, is it too much to expect journalists to report all the important facts?

Pirates Justify Their Theft

2008-10-21T15:32:00.000-07:00

My initial post on pirating received several comments from thieves defending their actions. As usual, the responses tried to blame software developers while minimizing the illegal and immoral actions of the pirates themselves. One of them even played the definitions game, pointing out that intellectual property infringement and theft are different actions. My response makes clear that this line of argument is irrelevant to the issue. What is wrong is wrong no matter what you call it, and pirating is wrong. Below is a typical comment and after that, my response to all comments.

Wow, dude, you're a judge or something ? Military ? Police officer ? Let's purge the world of the unworthy eh ?

I've got what, at home right now, in a box and around my computer, maybe 400 $ OF **** GAMES THAT I BOUGHT THESE LAST YEARS ? And all I am is a thief ? A criminal none the less ! I'm not rich that's for sure. And certainly not rich enough to enjoy playing a game for 3 days for 50 $. That's insane man, seriously. I'll have to prostitute myself to continu playing video games. Actually, is it worth it .... maybe, I dont know... I could get some easy cash with that guy ... NO, STOP !

You see, I'm against all those crappy developpers making crappy and unplayable games, tossing them one after the other for 50 $ +. PLAY OUR GAME, IT'S THE BEST ! And then, nothing. They fix a couple of things for a month, and then they forget you. They don't care anymore, you already got their stupid **** unplayable bug infested piece of crap game. THEY'RE MAKING ANOTHER ONE ! Why fix something you already bought, haha ! Buy the next one and see if it's better !

Anyway, I'm not as worse a criminel as you make it sound man (is this grammatically correct ? I'm not english, sorry !) ! Fallout 3 is coming out soon, and I'll certainly buy it. The least i can do, as i got Oblivion and Shivering isles pirated, and got a **** of gameplay hours (200 hours or something) ! Great game, but I just can't get myself to finish it. Ans then there's L4D, but like i said, with the support Valve offers, I'm buying everything they throw at me.

Hey, maybe we found the solution ! HOW ABOUT SOME SUPPORT FROM THE GAMES WE BUY. Update your ****, improve gameplay, add campaign missions, story modes, characters, VS options, MAPS, QUESTS, ANYTHING.
Thanks valve ! Vote Steam

CMON !

Love it when thieves try to hide behind semantics, stealing is taking something that doesn't belong to you without the owner's permission. Regardless of how you want to define theft, pirating is wrong, immoral, and illegal. That's the bottom line. You are taking and benefiting from someone else's hard work and depriving them of their deserved income. If I'm a game developer or musician, how am I supposed to make a living if everyone steals what I create?

Bashem, what another lame excuse. It's like a bank robber saying, "I deposited over $1500 in my account last month, and I paid $50 in overdraft fees while also having a CD at this bank! So what if I rob the cashier every once in a while? I do legitimate business with the bank!" What would a jury think of this defense? They would laugh, maybe they would find the robber not guilty due to insanity, clearly such a defense is so ridiculous that not even the most desperate defense lawyers would dream of using it.

Hey buddy, no one forces you to buy the games. But guess what? You get a lot of enjoyment from these games, that's why you keep on going back for more. Yeah I wish my car had a lifetime warranty and never broke down either. I wish that car makers would guarantee the car for life and pay for all maintenance too. You know how much I pay for routine maintenance? Why don't they make cars that never ever need repairs? I guess I should go and "borrow" a car, I return it after it breaks down. Hey, in the real world, that's grand theft auto and I'm a car thief if I do that. Blaming YOUR theft on the producer is just insanity.

Quote :

The least i can do, as i got Oblivion and Shivering isles pirated, and got a **** of gameplay hours (200 hours or something) !

Wow, 200 hours of enjoyment, and you still aren't willing to pay $50 for that? Let's see, a movie runs 2 hrs, that's 100 movies, and at $10 a movie, that's $1000 of entertainment if you go to the movies, even rental would cost you around $300. And you're still trying to justify your theft?

You are a thief, stop trying to justify your actions. You are not a good person, it's time to look in the mirror, you are a common criminal, no better than the pickpocket on the streets, except that you don't have the courage to do something like that where you can get caught.

You received a lot of enjoyment from the games you pirated. How it is fair that the people who spent months and millions to make the game get nothing in return? Why do those people who make the games get nothing while you get to play them? How is that fair in any system, by any code of ethics, by any moral belief, by any religion on Earth?

It's too bad you can't "afford" those games, but I bet that you can, you just don't want to pay for them because that means you have to cut expenses elsewhere. And in the end, these games are entertainment, you have no right to these games under ANY social philosophy, failed or otherwise. I want a lot of things I can't afford, like a beach front property, a Ferrari sports car, my own basketball team. You can't justify your actions, just admit you are a criminal and yes, society would be better off without your illegal and immoral actions.

Hey, I'm paying a lot for my apartment, how about I come over and share your space for nothing? You still get to sleep in your bed and have your place. Why would it matter if I share it, I can't afford my own space! There's plenty of room for both of us, I'll only use your bed, your stuff when you're not using them, it doesn't change anything does it? OF COURSE IT DOES! That's why we have property rights. That's why you can't go and use someone else's stuff if they're not using it. You aren't allowed to benefit from what someone else paid for without their permission. Otherwise people from you city could come into your room and use your stuff when you're not there. That's called trespassing and is banned in every society and country on Earth. From China to Russia to the USA, you can't go into someone else's home and use it without their permission. You have zero argument.

Bad Regulations Caused This Crisis

2008-10-16T01:58:00.000-07:00

Political Calculations provides a great case in point for my skepticism over regulations and regulators. The greatest problem with regulations is their unintended consequences.

An FDIC document on the risk weights of different bank assets. The higher the weight, the more capital the bank has to hold against that asset. As I read table 1 and table 3, if you originate a loan with a down payment of 20 to 40 percent, the risk weight is 35. But if you buy a AA-rated security, the risk weight is only 20. So if a junk mortgage originator can pool loans with down payments of less than 5 percent, carve them into tranches, and get a rating agency to rate some of the tranches as AA or higher, it can make those more attractive to a bank than originating a relatively safe loan. If you want to know why securitization dominated the mortgage market, this explains it. Regulatory arbitrage, pure and simple.

And the greatest problem with regulators is that they often do not act until it is too late. Regulators do not respond well to new technologies and new innovations because they are entrenched in a bureaucracy with a well-worn mode of operation. Going outside the box will put a regulator's job in jeopardy if he is wrong or at the very least, cause his actions to be examined. And if you have a cushy job, why rock the boat and put your generous benefits in danger? If all goes to hell, regulators can always just use the age old excuse that they don't have enough resources or that they need new powers and new regulations to do their job correctly.

I've heard too many people expressing a wish for more regulations recently, without any regard as to how these regulations will work and how they will be structured. We need more good regulations, but that's easier said than done. It's crucial we do not make more bad regulations and most of all, we cannot expect regulators to do a better job than they've done in the past. You can't expect a lifelong C student to become an A student. We have to factor in incompetence. Only then can we determine if the regulation is likely to do more good than harm. So far, only the good part is being examined, with nothing on the harm that regulations routinely inflict.

UK vs. US: Recapitalization Plans Compared

2008-10-16T00:55:00.000-07:00

There are substantial differences between the US recapitalization plan and the UK recapitalization plan that is widely being hailed by the media right now. Portfolio.com has a nice table showing some of the key differences. One big difference is with the 12 percent dividend the UK banks are required to pay. 12 percent dividend? Given that loans to homeowners and businesses will be in the 5-7% range, the banks will only be able to pay that dividend thanks to leverage. They can lend out several times more in loans than they have in equity.

However, if I were a shareholder, I'd know that there will be very little chance for me to profit. The shares will be very depressed for a long while, until the government sells and gets out of the banking system. Basically, there is no way for the banks to raise capital from private sources now. Who the hell will buy stock with all these restrictions and no potential for profit? With this move, the UK just nationalized all of the banks they injected capital into. There will be no other source of funding for these banks. The capital market is closed to them until the government gets out, period. That's a huge difference between the UK and the US. US Treasury's terms were not so harsh that it removed all profit potential. Government will share in the gains, but won't hog all the upside for itself. And with that comes the possibility of raising money from private sources.

Has the UK and The Bank of England bit off too much to chew? I don't know, we'll have to see, but thanks to their harsh terms, they'll have to recapitalize their banks unilaterally. And I thought the UK was against unilateral actions.

Why Doesn't the Government Ask for More?

2008-10-15T00:07:00.000-07:00

Some are asking why the government isn't getting a better deal like the one Warren Buffet received from Goldman and GE. Yes the government is only getting limited upside through warrants, but you cannot make them pay more than they are capable of or else they will fail under the burden of the payments to government. If we think banks will have to take more losses in the future, then making them pay 10% interest dooms them. There is no loan out there that banks can make 10% on, without taking a huge amount of risk! Buffet got his good deal because Goldman and others hoped that his investment would encourage others to invest with worse terms. So he was paid a premium as an advertisement to the rest of the world. His stamp of approval cost that much, Goldman cannot afford the same terms for everyone.

You also cannot wipe out existing shareholders and bondholders without a good reason, like the bank is insolvent. If there is anything left, there is no justification for government to take that away. Under bankruptcy, the bond holders are entitled to the assets, and the shareholders whatever is left.

If you are going to wipe out shareholders and bondholders, then why bother making this transaction? Why not create a new bank and allow the old one to fail? If the purpose is to prevent the bank from failing, then you cannot punish shareholders and bondholders beyond a certain point. This is especially true with bondholders which get the assets in a failure. As for common shareholders, they only get what is left after the government gets the dividend from the preferreds, their future profits are diluted, not to mention the warrants. And as I noted before, you can only ask the bank to cough up so much in dividends and interest before it becomes impossible for the bank to continue. A bank dies when its cost of funding becomes larger than the profit it can make from operations. A very high dividend rate on the preferreds and the bank cannot make money and is guaranteed to fail. People aren't stupid, if they calculate and see that there is no way for a bank to make that much to pay the government, they will start selling and we'll have a rout.