21 December 2008

Auto Bail-out

Here is a good article from Megan McArdle's blog at The Atlantic.

At first I thought the insane labor costs of the Big 3 were the reason they are unable to generate profits in an era of true competition against foreign manufacturers that are efficient and producers of quality products. Then I learned that labor costs are only 10% of total costs for these companies. After reading this post I've changed my mind.

An oligopoly exists in domestic auto manufacturing and the labor supply to this oligopoly is monopolized; this isn't new information to me. What is new information to me is the way these two elements interact. It's not so much about them being able to make money by reducing the cost of generating quality output, but the lack of incentive to actually produce quality products. If they actually made good cars that people wanted to buy they could make money given current costs. Hell, they've done it in the past. Their brand is now so tarnished and there are so many better alternatives available that demand for their products is finally diminishing. Quantity demanded has fallen at every given price level.

It's pretty clear to me now, and I don't know why I didn't realize it earlier. Common sense: if you build a crappy product people won't buy it...period. It doesn't matter if you produce it inefficiently or efficiently. If sales revenues are zero then you're going to lose money. I'm now a believer that people just don't want to buy American cars any more (at least not as much as they used to). And that changes the whole business model.

17 December 2008

A day of excitement

The Runnin' Rebels come through brilliantly and it snows all day long in Las Vegas! What a day!

Up until today I haven't seen any real excitement in any of the Rebels performances. Come to think of it, even last year didn't impress me that much. But tonight. Oh yes, I saw some things I really liked tonight.

Rene Rougeau has been catching my eye every game since the start of this season, and after tonight's performance I'm ready to ask for his jersey for Christmas. He hustles every damn game; plays his heart out, scores points and gets boards.

DID YOU SEE THE OOP?!? Damn that was sick! The feed to Santee down low for the dunk was also great! Then there were a couple of flat-out rejections on the Broncos. I was jumping up and down in front of my TV screaming silently at every exciting play that happened. It's good to see the Rebels asserting themselves and really demonstrating some good, selfless teamwork and exciting basketball. Wink seems to be coming out of his slump and Joe Darger is finally making some three's. Bellfield is looking good, as is Willis. All around the team was just looking much better.

As Coach Kruger was heard saying in practice on Tuesday: "We have to dictate more!...We have to deny!" And we certainly showed tonight a little bit that we are capable. Let's keep it up Rebels and dominate Arizona on Saturday!

11 December 2008

Culture & Cars

More important than regulatory change is the need for a cultural shift to better
emphasize long-term issues, Useem says. Utlimately, he notes, Americans
may adopt a disdain for short-term risk taking similar to the disgust they have
developed for smokers who light up in crowded rooms. A new
risk-consciousness held by the public should work its way into the boardroom and
executive suite, he says. "Rebuilding the national culture becomes
absolutely vital."

That's from a piece over at Knowledge @ Wharton.

In some of my conversations with friends, family and colleagues about the current economic and financial situation I have asserted that the cultural values of Americans concerning business matters are fundamentally flawed. The quote above resonated with me and succinctly summarizes what I had in mind when speaking of this. More generally, a lack of concern for longer-term issues is causing bad decisions to be made in the present.

Consider the fight for a U.S. auto industry bail-out as an example. We know that the U.S. auto industry is not competitive against foreign manufacturers and their operations are inefficient, partly because of the use of union labor. The same people fighting for the bail-out even admit this. But how will a bail-out help if their operations are inefficient and unprofitable? The kind of change needed in domestic auto manufacturing won't come in a few months (the bail-out is probably only going to sustain operations until March of 2009). It will take years, if not a decade to change. Does the American taxpayer continue to subsidize operations during the transition period? I certainly hope not, because it is not improbable that they will take tax dollars and still not change, leaving us in the same position years from now. No, the answer is to adopt a long-term view of what is best for the nation. Oh yes, their will be many jobs lost if the U.S. auto industry goes under. But is that really such a bad thing? I mean, in the long-run? Resources are not being used efficiently right now; workers labor and material could be put to better use. Sure, it will take some time for new industries to develop and utilize the resources, but they will use them more efficiently and more importantly, profitably. The problem is that darn trade-off between short-term comfort and long-term viability. A society focused only on the former can never achieve the latter.

01 December 2008

Auto Woes

Well it looks like most people are thinking about the auto industry debacle the right way.
If the automakers’ difficulties can be traced to a single, essential failure, it is their belief that they could avoid change. This is evident in their management structure, their labor contracts, and, most consequentially, their cars. For the past thirty years, the Big Three have been promising one hyper-efficient vehicle after another—the electric car, the “super car,” the hydrogen car—only to produce bigger and bigger gas guzzlers. (It was while the carmakers were supposedly working together, and with a billion dollars of federal money, to create a “new generation of vehicles” that G.M. purchased the rights to the Hummer.) The only compelling argument the companies can make at this late date—if a man strapped with explosives can be said to be making an argument—is that they will not suffer alone.

That's from the New Yorker. And the fact that many will suffer if the Big Three go under is not being disputed by anyone. The question is whether or not avoiding that suffering is worth doling out free money to save inefficient firms that are unwilling to change. It's obvious to me that without the proper incentives they will not change their behavior. Let them save themselves or fail, but don't ask for my tax dollars.

30 November 2008

Liquidity Preference

I'm not so sure about this idea of Arnold Kling's.

If it gets pricier to stay liquid with Treasury securities then it will be less attractive to acquire said securities. However, this does not solve the counter-party trust issues. If firms still don't trust each other they will still demand some type of collateral. If it's too expensive to use Treasury securities then what will be used? Cash?

18 November 2008

U.S. Auto Industry Bailout

Should not be done. That's what I have to say. I won't elucidate my own thoughts why; just read this fine post from Will Wilkinson and we'll be on the same wavelength.

Let them fail, let them fail, let them fail. Purge the inefficient producers and move on to the next stage.

14 November 2008

The Future?

From an AP article talking about the economic downturn:
Bush and other leaders from the Group of 20 nations, representing the world's
richest economies plus major developing nations such as China, Brazil and India,
were expected to agree during two days of talks to set up a new "college of
supervisors" to oversee the global financial system. The group would include
financial regulators from many nations.

A flashing thought ran through my mind: this sounds ominously like nascent one world government.

Maybe I'm just a nut.

11 November 2008


It's odd how the mind wanders. I was watching television when I saw a suit against the drug Seroquel. I'd never heard of it, so off to Wikipedia for knowledge. While reading about Seroquel's uses (antipsychotic drug used for schizophrenia and bipolar disorder) I read about other drugs used to treat the same conditions. Benzodiazapenes are mentioned, and lorazepam in particular. Now I used to take lorazepam for anxiety and panic attacks. So now my focus moves to lorazepam and it's uses and side-effects. This brings me to a disorder I've not heard of before: depersonalization disorder (DPD). After reading about it for a bit I acknowledge various similarities between DPD and the way I often feel. And finally I come across this quote in the Wikipedia article:
I find myself regarding existence as though from beyond the tomb, from another world; all is strange to me; I am, as it were, outside my own body and individuality; I am depersonalized, detached, cut adrift. Is this madness?
So, the point? I'm not sure what the point is, but I know that reality and consciousness are wildly difficult things to fully comprehend and understand; and that is a great thing.

Woe America

“My house is underwater, so I’m not doing too much impulse shopping or any renovation. But I’m not cutting back on this,” said Ray Lopez, a database administrator, as he placed a $24 petite sirah on the counter. “Life’s too short.”
...says a man about wine. I'm not cutting back on the booze either....only I'm drinking Miller Lite instead of fine wine. And it could very well be Keystone soon. I bet cheap beer is a counter-cyclical asset.

From a story in the New York Times.

10 November 2008

Rebel Fever!

If you're a Runnin' Rebel fan then you need to put this site on your list of those to visit daily:

The Rebel Blog

With college basketball starting up and a hot Runnin' Rebels squad to watch all season, this is one of your best sources for Runnin' Rebel info. The posts are splendid. Take this one for example.

I've been visiting this site for the past two seasons, and will continue to visit as long as it remains up.

06 November 2008

Many heads are better than one

I've never heard of this theory before and I was trying to explain this concept to my dad just last night. Aggregated intelligence, a truly amazing thing.

Condorcet rigorously demonstrated that, in large elections, many heads are better than one. Consider a contest between two candidates. Each voter has some information about which candidate will be better, but no individual can be sure that his or her information is accurate. If any one individual has to make the decision, he or she would choose according to the information available. However, there is a significant probability that the decision would be incorrect.

On the other hand, if each person's information is somehow correlated with the truth, then, even though no single individual is well-informed, the electorate in the aggregate is very well-informed. Condorcet's theorem demonstrates that if people vote according to the information they have at hand--even if it is scarce or incomplete--then, in large elections, the outcome will be the same as it would be if all voters were perfectly informed. That is, elections successfully aggregate information and produce results better than any individual acting alone.

Thanks to Greg Mankiw for finding this piece at Forbes.

04 November 2008

Truly an historic moment...

"Barack Obama will be the next president of the United States"

from the Economist...

02 November 2008


Thomas Sowell slams Barack Obama and the Democrats.

After this man has wrecked the economy and destroyed constitutional law with his judicial appointments, what can he do for an encore? He can cripple the military and gamble America's future on his ability to sit down with enemy nations and talk them out of causing trouble.

A thought...

from the Economist on Barack Obama:

"There is no getting around the fact that Mr Obama’s résumé is thin for the world’s biggest job. But the exceptionally assured way in which he has run his campaign is a considerable comfort. It is not just that he has more than held his own against Mr McCain in the debates. A man who started with no money and few supporters has out-thought, out-organised and out-fought the two mightiest machines in American politics—the Clintons and the conservative right."

[emphasis added]


What a coincidence

I wonder if he hangs out with Joe the Plumber.

Time Banks

Here is a short post about time banks. I've thought about something like this before, but have never heard of it actually taking place. I like the idea of building social bonds through it's use. Instead of just trading services explicitly (like with money), participants would seem to gain cultural experiences and social interaction that could make people happier and more satisfied.

29 October 2008


This makes me sad and ashamed of not only my fellow countrymen, but of humanity in general. My pessimistic world view has just been given new life.

I like the guy with the Acorn banner; he isn't even coherent.

I support neither McCain nor Obama. It doesn't matter who the hate is directed towards, the fact that it's bred in ignorance and thrives in a modern society is unacceptable.

Thanks to Rob Pitingolo for the post.


I laughed so hard for two minutes straight because of this. I still can't pin why it's so damn funny.

23 October 2008


I've had about enough of the complaint that the media is unfair in the coverage of the Presidential candidates.

Honest, I just heard a Fox News employee say that he has been in the media for 10+ years and that the media is absolutely biased (except for Fox News, you know, because they're "fair and balanced"). Well that's a shocker! For some crazy reason I thought the media had my best interests in mind. I mean, why would they be concerned about drawing the largest audience possible to make profits from advertisers? The media wants to bring me the truth. Anyone who believes that is a damn fool.

On top of telling us something that any intelligent person already knew, this guy goes on to complain that bias causes unfair coverage of the candidates and the "liberal media's" excessive positive coverage of Barrack Obama is going to discourage McCain supporters and thus ultimately shape the outcome of the elction in favor of Obama! Are you serious! I didn't really just hear that.

I guess that the biggest problem I have is the supposed premise behind this type of complaint. For whatever reason, some people seem to think that the media has a responsibility to the public to be fair and balanced. I'm not sure if I believe media outlets have any responsibility to the public. They are competitive firms, offering a product to people who desire it. The cost to the consumer is advertisements, which firms make a tidy profit from. End of story. They can get up and say anything they want, spin the facts any way they wish and endorse (implicitly or explicitly) whomever they prefer. Don't whine about unfair coverage and the possible effects on voters actions as a result. If McCain supporters are going to admit defeat and not cast their ballot because the media made it look like a landslide victory for Obama then so be it. They're responsible for their own actions (however stupid those actions may be). But don't get up and whine about fairness because things aren't going your way.

22 October 2008

George is gettin' UPSET!

"What should you -- the young -- do? First, get angry..."

That's what Mr. Robert J. Samuelson says about this election and the candidates. A good article in the Washington Post.

21 October 2008

Who said patience is a virtue?

A fairly scathing criticism of Fed Chariman Ben Bernanke.
Bernanke suggests that “prompt passage of the financial rescue legislation” will allow financial firms to fulfill “their critical function of providing new credit”, but even there he misreads the problem. Banks don’t so much lack money to lend as they don’t trust the balance sheets of other banks. The latter in mind, the alleged financial rescue plan will only serve to make the health of banks and the securities on their balance sheets even more opaque due to the insertion of money not from market-disciplined investors, but from the federal government itself.

This part of the piece really hit the nail on the head in my mind. Tyler Cowen posted a while back over at Marginal Revolution on the same idea. His example was something along the lines of this:

Suppose there are 10 banks in an economy, 3 of which are insolvent. The public doesn't know which ones are insolvent, but the insolvent banks know who they are. If the Fed steps in and starts giving all 10 of them money then we end up prolonging the process of discovering which banks are the bad apples and should be allowed to fail.

It makes sense when you think about it. Masking the problem doesn't fix it. But I guess some would argue that giving the bad banks money may actually resolve their problem of insolvency...changing the bad apples into solvent institutions. But this would only happen if the insolvent banks received enough cash. The biggest banks in America are only receiving a proposed $125 billion. If you're a bank in serious trouble then a relatively small injection from the government will only delay your failure. The banks that are in good shape know that there have to be some minimum number of insolvent banks out there that will go under in time. The smart thing would be to shorten the amount of time it takes for the discovery to take place. Injecting capital into financial institutions is only increasing the amount of time needed; we should be doing exactly the opposite to hasten this crisis of trust.

The Bubble: Part 2

An interesting excerpt from a piece at RealClearMarkets:
The market responded to the price signals given by the Fed and loaned money that the Fed deemed nearly worthless. When the price of anything is held artificially low the logical result is a future shortage. Thus we now have a shortage of credit just as one would predict based on past experiences with price controls.

At first reading I completely disagree with this statement. "Easy money" no doubt contributed to the current debacle, but it was not the primary reason. Government policies that encourage excessive levels of home-ownership (and thus artificially high demand for mortgages) and the absence of anything else profitable to invest in are a much bigger cause of this mess.

During the tech boom of the late 1990's the big investment banks like BearStearns and Lehman Bros were making profits on the deals they brokered to bring ".com" ventures online. After the bust of that bubble they were caught sitting on their hands with not many ways to generate the large level of profits they had during the boom, so they got into a new market: mortgages. The only way to make big profits is to take big risks. But nobody wants too much risk, so enter the MBS (mortgage backed security). Let's bundle mortgages together and issue bonds that pay from the interest stream of the mortgages. The risk gets spread around to everybody; the risk is mitigated now, so let's keep demanding more mortgages to securitize, encouraging the banks originating mortgages to increase their risk tolerance (really not even tolerance, since they didn't hold the loans on their portfolio's anyway---they were sold off for fat premiums). Hello subprime! Banks will originate mortgages to nearly anyone, because they're not holding the loan for it's life. Brokerage houses package them up and "distribute" the risk and collect a hefty fee for the securitization services. And the ultimate investors buy the bonds backed by the mortgages because house prices never decline!--the interest will keep on coming because any mortgage borrower in trouble can simply refinance.

The point of my ramble is that "easy money" wasn't the sole issue. There were artificially high levels of demand too, leading to the inflation of a bubble that how now burst.

Investor's were used to the excessive profits of the tech boom and demanded that Wall Street continue to perform; and Wall Street delivered, by finding new ways to make boatloads of money without ever creating any real value. It was a repeat of the tech boom, with mortgage assest substituting for tech stocks.

The rest of the article is good though; I actually agree with the idea of letting the market work everything out on it's own, even though Keynes is probably surely looking at me incredulously for saying that.

20 October 2008

On Krugman

Here is a good article from the Economist on Paul Krugman's contributions which earned him the Nobel prize in economics. If you've never read his blog or his columns in The New York Times, you should start.

15 October 2008

It'll be like an extended tailgate...

An excerpt from the Beige Book on the 12th District of San Francisco concerning retail sales:

"...outdoor equipment such as camping gear was one bright spot, as households gravitated towards low-cost vacation options."

Low cost vacation or preparation for 1929 again? Well, if we do end up with Hooverville's again,

at least we'll have some very nice camping gear (thanks to technological improvements) to get us through.

06 October 2008


From the Prime Minister of Iceland:

There is a very real danger, fellow citizens, that the Icelandic economy, in the
worst case, could be sucked with the banks into the whirlpool and the result
could be national bankruptcy.

The task of the authorities over the coming days is clear: to make sure that
chaos does not ensue if the Icelandic banks become to some extent

It's crazy to hear the leader of a nation talking like this. Could this ever happen to the United States? I'm a pessimist, so you know my answer. I fear, "Yes."

04 October 2008

Interest Rates

Greg Mankiw asks why real interest rates are rising. Short term Treasury bill yields are very low (because of increased demand for safe assets) but the yields on 5 year government bonds (inflation adjusted) are rising. He says "It's a puzzle."

It sort of is. I'll admit now that I don't know much about how rates typically move together and my simple conjecture is probably inadequate, but it's the best thing I can think of off the top of my head so I'm going to make it.

There's obviously great uncertainty out there about what's going to happen in the near future and in the medium-run/long-run as a result of the crisis we're in and the attempted rescue by the federal government. That said, even though 5 year government bonds are probably a pretty safe bet, I would think that most savers want to maintain liquidity right now. A 3 month T-bill is a much better purchase compared to bonds considering that nobody knows what's going to happen over even the next few months, let alone 5 years (Even though the bonds are inflation adjusted people may be so freaked out right now that they are only concerned about the return of their money and not the return on it [thanks to Mark Twain for that phrase]). As a result, demand for longer term assets is not as strong as that for very short-term assets such as T-bills. People holding longer term assets may actually be selling off and putting their cash into the T-bills.

Adidas has a good slogan for the current times: Impossible is Nothing. We've seen things happen over the past year that basically had a P(0) or damn close to it; so why would faith in the government's going concern not be shaken. It's not very likely, but there is that slight chance that the government might not be able to pay back those 5 year bonds, and with all the fear out there right now people are considering such a default more seriously.

Oh Thank Heaven!

7-Eleven is offering coffee cups that show everybody which presidential candidate you support (or dislike the least). They started with the 2000 election (I've never heard of this) and the poll has successfully predicted the two elections it's covered. It's called 7-Election (cute). Here is the website. Results are published weekly in USA Today newspaper.

Thanks to NPR's Wait Wait... Don't Tell Me!'s website for the tip.

The Crisis Continues

Now even municipal governments are having trouble getting the short term funds they need to operate. This thing gets wilder by the minute.

Thanks to Marginal Revolution for the lead.

28 September 2008

The Dominoes Continue to Fall

From the AP. Monday morning ought to be nuts!

Get Schooled

If you've got about an hour to spare then watch this video which explains simply and accurately the current economic and financial market turmoil that we are experiencing.

23 September 2008

The Most Important Criteria to Consider...

This is from an open letter to Congress on the possible bail-out plan. I think it's the most important consideration...

3) Its long-term effects. If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, Americas dynamic and innovative private capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.
Thanks to Marginal Revolution for the post.

22 September 2008

Food For Thought

Oil just jumped over $20 a barrell today. Looks like people are responding to the potential jump in inflation due to the federal government's decision to tack on $1 trillion in debt to "save" the financial system and the economy. In case you cannot tell, I'm not very confident that current actions by the Federal Reserve, Treasury, and Congress are going to "save" anything. It's looking more and more like the implications of decisions to assauge current issues will seriously endanger our long-run economic stability. So what's next?

19 September 2008

Light Reading

Will Wilkinson with an interesting post...

The Best...err, Worst is Yet to Come

A good point from David Roche in the WSJ:

When bank credit does contract, the impact on the real economy will be more marked than we have seen thus far. The reason is that most bank credit is the sort of money that gets spent in shops and garages, or is used by the corporate sector to invest in real assets. NDFI money is used to invest in financial markets, causing security prices to rise and fall, which only indirectly affects the real economy by changing the value of wealth.

The Future of Regulation

From Paul McCulley at Pimco...

17 September 2008

What Lies Ahead

While most are concerned with the present moment (and have every reason to be), Kenneth Rogoff is looking beyond the current situation to the future implications of our attempts to avoid total catastrophe by giving bail-out after bail-out.
A large expansion in debt will impose enormous fiscal costs on the US,
ultimately hitting growth through a combination of higher taxes and lower
spending. It will certainly make it harder for the US to maintain its military
dominance, which has been one of the linchpins of the dollar.

The shrinking financial system will also undermine another central
foundation of the strength of the US economy. And it is hard to see how the
central bank will be able to resist a period of allowing elevated levels of
inflation, as this offers a convenient way for the US to deflate the mounting
cost of its private and public debts.

So even if all the magic tricks work and we avert a complete meltdown caused by exotic finance and the folly of making too much money off of money, the repercussions of our rescue efforts (whether successful or unsuccessful) will be felt for years to come.

15 September 2008


Okay, so the Rebs upset No. 15 ranked ASU on Saturday night in a thriller of a game. Of course there was barely any coverage on the television, but at least there was an article [actually just a game recap] posted on ESPN.com. Something that made me chuckle:

"No disrespect to them, but we let them hang around in the game, and look what
happened -- they beat us," ASU safety Troy Nolan said.

Well, just take a look at the stat sheet and try to tell me again that ASU "...let [UNLV] hang around in the game..."

Owned son! 'Nuff said. Good luck against Georgia next week....CHUMPS!

10 September 2008

The Political/Economic Debacle

From Tyler Cowen at Marginal Revolution regarding the Fannie Mae and Freddie Mac bailouts...

In essence we already agreed to the bail out some time ago.  Have you ever spent $17,000 on a car and asked the dealer what the warranty for the car "really meant"?  Well, the Chinese spent $340 billion on agency debt and probably asked the same question at least once or twice.  They live in a world of secret agreements with leaders, not transparent democratic arrangements.  So when it comes to the U.S government decision, we're not just starting from scratch here.  How many phone calls do you think Hank Paulson has received from the Chinese central bank since August 2007?

"Are you *sure* that paper is safe enough for us to keep on buying?"

We'll never know exactly what kind of verbal dance Paulson concocted in response, but just look at the resulting flow of purchases and the relatively slight mark-up over Treasuries over that period of time.  The Chinese (among others) thought we were standing behind the securities, at least in any world-state short of federal government quasi-bankruptcy.  (In fact Paulson is in a total bind once that phone call comes in.  He doesn't have much incentive to just say "tough luck" and precipitate a crisis when otherwise no crisis is on the horizon.)

So should we try this: "Oh, is that what you thought?  Guaranteed?  Did we use that word? Sorry, try reading our signals better next time.  We love you.  Great job with those Olympics.  And when it comes to those Treasury Bills, we really do still mean it.  And don't forget to support us on Iran and North Korea."

I think Mr. Cowen has brought up an important point that I haven't heard many (if any) people talking about, and that is the political implications of this credit crisis.  The global economic implications have been pondered.  But the political have yet to be speculated upon.

There's no shortage of people arguing against the bailouts, but they seem to fail to understand that we cannot just tell all the foreign institutions that bought Fannie and Freddie debt to eat crap.  We still have to maintain relations with them.  The common (and even preferred) shareholders are more ambiguous entities that are easy to forget, and we can wipe them out without fear of significant negative repurcussions; but foreign countries that bought hundreds of billions of dollars in debt from these companies can't be disregarded.  Take the Chinese for example, as Mr. Cowen has.  They've been buying American debt (both private and public) for probably the past decade (I'm not sure how long exactly and haven't looked up the figures).  Their investment has fueled American economic growth from the late 90's on.  If we crap out on them now by refusing to guarantee the debt they've bought then we won't be seeing much capital coming from them for the next decade or so, severely limiting our government's ability to borrow money and our national economy to grow.

The political implications are mentioned in Mr. Cowen's hypothetical situation.  Where do foreign relations end up if we screw them over on this?  They probably won't be likely to back us in foreign disputes and could potentially become hostile regarding trade.

I was skeptical at first about the bailouts, even a bit weary.  But as more light is shed on the situation, it's becoming more and more clear that this is a necessary action, even though it's putting taxpayers on the hook for potentially hundreds of billions of dollars.

08 September 2008

The 20 Rule

Update: More thoughts from Arnold Kling.

Arnold Kling thinks you should have to put 20% down to get a mortgage.

"My approach would make it more difficult for many families to achieve home ownership, because many families find it hard to save the money for a 20 percent down payment. I am willing to let those families deal with being renters. As fantasy mortgage czar, I value stability of housing markets and financial institutions more than raising the home ownership rate."

I don't think that's too bad an idea. In the past decade, getting a mortgage was so easy because you could come in with basically nothing down. This encouraged excessive demand, leading to rapid building and resulting in the over-supply of homes. Combined with the general distress in credit-markets, the over-supply has combined with tight credit to drive prices down and set off a chain of events that have caused a lot of economic turmoil.

George W. Bush has been talking about and advocating increasing home ownership for a while now (since at least 2002). Here, here, and here. In fact, he said in a June 18, 2002 speech:

"...I believe owning a home is an essential part of economic security."


"The goal is, everybody who wants to own a home has got a shot at doing so. The problem is we have what we call a homeownership gap in America."

Now what is so important about owning a home? How does it increase economic security and why should we care about the "homeonwership gap in America"? As long as people have a roof over their heads then we're doing okay. Whether you are renting an apartment or living in a home with a mortgage on it, you have a place to live. Owning a home isn't for everybody. There's maintenance and taxes that go along with it, in addition to lack of mobility. Renting is just plain better for some people. As far as I know, nobody was complaining about not being able to have the chance at owning a home. Mr. Bush just started blabbing about the American Dream one day and decided to do something that looked patriotic.

If you can't save the money to put 20% down on the home you want to buy then you shouldn't own a home. Some may say this is "unfair" (that's the vibe I get from Mr. Bush's statements and stated goals -- oddly a Republican is talking about social and economic equity, ha!), but life ain't fair. In my opinion, as long as people can afford to put a roof over their head (via renting or purchasing), then we are doing just fine.

Kling opines that the housing market would be more stable if 20% down were required, and I'm inclined to agree. It just makes sense. There's risk there. If you have to put 20% down, that is cash out of your pocket. Even if housing prices decline one day in the future, your 20% is gone and you still owe on a mortgage. I would think you'd be less inclined to walk away and let the bank foreclose. But if you only had to put $2,000 down then you don't have much to lose when times get tough, making you more likely to walk away. In the current situation this "walking away" by a large number of borrowers is causing banks further losses and driving home prices down further, making everything worse off for everybody. The situation might not be so bad, or in existence, if we had stuck with the 20% down principle of lending for homes.

07 September 2008


From Michael Munger.

"All votes are wasted unless the election is decided by a single vote. The question is, how are you going to allocate that single vote that you have? Are you going to honor your principles or vote for the lesser of two evils?"

That didn't take long

It was pretty much inevitable.

"The Treasury Department on Sunday seized control of the quasi-public mortgage finance giants, Fannie Mae and Freddie Mac, and announced a four-part rescue plan that included an open-ended guarantee to provide as much capital as they need to stave off insolvency."

But will this really help make things better in the short-run? I don't believe so. The downward spiral of housing price declines will continue nonetheless because the supply of homes is simply too great. When the new equilibrium is reached prices will settle and stay low for quite a while.

05 September 2008

Wants and Needs

Here is a little something original. I wrote this a few years ago and just stumbled across it while rummaging through old files trying to clean up my drive. I was probably high or drunk (maybe not drunk; this is too coherent for a soused writer like me) and feeling profound. Anyway, as I read it again I realize that I still hold some of these beliefs. I guess I haven't changed as much as I thought I have since then.
Want is the desire to fill need.

Most people don’t understand this. Most people view need as the superior to want. Everyone agrees that want is a desire; but most people think that need is something beyond human control, beyond human manipulation.

‘Tis not so. Need is not above want. It is the other way around. Want is beyond anything in the world, anything in existence.

I’ve come to this conclusion after analyzing the standard interpretation of want and need. What put me on to this subject of thought was the idea of value. I know that my life is pointless, so is everybody elses. There is no purpose, no point, no value in this life. The only value that exists is that which we create.

The general consensus is that for people to feel valued they must be needed. I feel differently. For me to feel valued I must be wanted. For people to need me gives me no value; at least not to myself. Everybody needs other people, but when somebody, or other people, want you, you become a commodity in demand. It’s basic economics. When I am in demand I am of value, both to myself and to others. Anybody can satisfy a need, but only those who strive to please and fulfill the needs of others are wanted. The only way to place any value on oneself is to be desired by others.

It’s simple, really. When others need you they just utilize you because you will do the job. You will suffice. I don’t want to suffice. I want to go beyond expectations, to go beyond need. When you are wanted others desire you; others will go out of their way to use you.

It’s far to common, people being used just because they are available. We see it everyday. Relationships, jobs, friendships. They are all out of need.


Something funny

I got a good chuckle out of this. It's funny on a couple of levels.

One Utah community is cheering a special bear — but don't call him Smokey.

I'm not dead!

A really good article from the New York Times Magazine.

28 August 2008

21 August 2008

"Education" is Flawed

"Today, there are two worlds that use the word education with opposite meanings: one world consists of the schools and colleges (and even graduate schools) of our education complex, in which standardization prevails. In that world, an industrial training mega-structure strives to turn out identical replicas of a product called "people educated for the twenty-first century"; the second is the world of information, knowledge, and wisdom, in which the real population of the world resides when not incarcerated in schools. In that world, learning takes place like it always did, and teaching consists of imparting one's wisdom, among other things, to voluntary listeners."

Jesse, I thought you'd find this interesting.

08 August 2008

A Second Stimulus?

"Before last Thursday, there was no second stimulus proposal. Now there's a proposal from the Chairman of the Senate Appropriations Committee, Senator Byrd (D-WV), but we have seen no indications that House or Senate Democratic leaders have signaled support for that proposal."

Greg Mankiw has a source in the White House with the scoop.

07 August 2008

Decisions, decisions...

"With mounting inflationary pressure, the Fund added: “Policy trade-offs between inflation, growth and financial stability are becoming increasingly important.”"

This is from an article in The Financial Times covering the outlook offered in a report issued by the International Monetary Fund concerning the credit crunch.

What I see happening is high commodity price inflation combined with a now risk-averse financial system and limited economic growth in the U.S. because of dampened consumption. We've been financing our consumption for the past decade or more, so now that we can't borrow anymore consumption will fall and the economy will slow or stall. Cutting the federal funds rate in an attempt to affect real interest rates hasn't had much impact and probably won't while the general outlook for lending and investment remains extremely risk-averse. The Federal Reserve has maintained financial system stability through the use of new tools such as the TAF, the TSLF and the Primary Dealer Credit Facility as well as the Bear Sterns bail-out...but preventing a meltdown hasn't restored confidence in the markets to previous levels.

So, consumers can't borrow to consume and firms can't borrow to invest and the result is declining consumption and crawling (if not negative) economic growth. Rapid and sustained commodity price increases are driving inflation upward (let's hope the weak labor market constrains wage growth, otherwise a wage-price spiral will be the next calamity). And maintaining financial system stability isn't restoring confidence in the basic ability of the financial system to channel funds from savers to borrowers.

The Federal Reserve is trying to juggle a few balls at once, and the appropriate response to these problems isn't easy to come by.

Lowering the federal funds rate further probably won't have much of an effect considering the fear of risk in lending right now; the net effect on the economy would be nil, so this isn't really an option (or one with any impact, anyways).

Raising the federal funds rate would drive real interest rates higher than they otherwise would be in the current situation, further curtailing growth, but at the same time relieving the upward pressure on prices and thus constraining inflation (before long-term inflation expectations become unanchored) and restoring some faith in price stability. This is a possibility, but the cost is slow or negative growth (and rising unemployment). The FOMC expressed concerns about both growth and inflation in it August 5th policy statement, but didn't say which was the priority at this time. Personally I would argue that inflation should be the priority right now. I say this because inflation expectations are very difficult and take a long time to cement. If inflation expectations are unanchored now it could take 10 years to correct, making it difficult for growth to occur during that time because of uncertainty about prices and interest rates offered on loans.

Growth can bounce back and forth relatively quickly, compared to inflation expectations. Raising rates might not be such a bad move.

Wishful Thinking

"The company [Freddie Mac] also reiterated its commitment to raising at least $5.5 billion from investors."
"The company’s [Freddie Mac] entire worth as measured by the stock market was $4.2 billion as of Wednesday afternoon."

Yeah, right. Here is the NY Times article.

06 August 2008

Olympic Politics

"...it’s becoming clear that the I.O.C.’s decision to give the 2008 Olympics to Beijing is its worst call since 1936. Now that it’s too late to turn around, China is busy breaking all its promises to improve human rights, allow uncensored coverage, or even—for God’s sake—clean up the air in Beijing so that marathoners don’t fall dead in the streets. I know we’re supposed to say nice things about China as a rising power and welcome it to the world stage because anything else inflames Chinese nationalism. But the Chinese leadership wants to have it both ways: quick to criticize President Bush for interfering in China’s sovereign affairs when he had the decency to meet Chinese dissidents this week, but eager to cash in on all the geo-political benefits that the Olympics will bring. China didn’t even bother to abstain last month but instead vetoed sanctions against Robert Mugabe at the U.N. Unlike Germany in 1936, China is prettifying its streets without pretending to prettify its foreign policy."

From an interesting post on the blog Interesting Times at The New Yorker.

05 August 2008

FOMC Meeting

Well, the FOMC statement has been released.

"Economic activity expanded in the second quarter..." and "...the inflation outlook remains highly uncertain."

And once again Dallas Fed President Richard W. Fisher voted to increase the target for the federal funds rate (I agree with his action).

This statement is nearly identical to that of the June 25 meeting. However, the Committee did express a "singificant concern" about the upside risks to inflation, something not mentioned in previous statements. Inflation indicators are ticking up ever faster and it seems as though the Fed has lost traction in reagards to the use of the federal funds rate; mortgage rates and interest rates for corporate debt are not being signifcantly affected. So instead of keeping the federal funds rate low and adding to the upside risks to inflation, why not start raising the federal funds rate slowly?

30 July 2008

Crazy Inlfation in Zimbabwe Continues

Here is a very short bit on it...

I'm on track--I think like a Harvard prof...

Ken Rogoff (Harvard professor of economics) writes in the Financial Times on July 29:

"The huge spike in global commodity price inflation is prima facie evidence that the global economy is still growing too fast...The world has just experienced perhaps the most remarkable boom in modern history."

"...Absent a significant global recession (which will almost certainly lead to a commodity price crash), it will probably take a couple of years of sub-trend growth to rebalance commodity supply and demand at trend price levels...In the meantime, if all regions attempt to maintain high growth through macroeconomic stimulus, the main result is going to be higher commodity prices and ultimately a bigger crash in the not-too-distant future."

"...In the light of the experience of the 1970's, it is surprising how many leading policymakers and economic pundits believe that policy should aim to keep pushing demand up. In the US, the growth imperative has rationalised aggressive tax rebates, steep interest rate cuts and an ever-widening bail-out net for financial institutions."

Some are arguing that we don't have much to worry about; that we're out of the woods now. But a depreciating dollar and continued growth in demand for basic commodities and essential goods as a result of both real supply shock and misguided macroeconomic policy will only make the inflation that ensues that much harder and longer. Stabilizing inflation expectations after such unscrupulous policy decisions will take years, if not up to a decade, making it much harder for the economy to expand when uncertainty about price stability is high. One of the things necessary for the U.S. economy to expand and stay strong is stable prices. But policymakers seem to be abandoning their caution when it comes to inflation these days (except for Dallas Fed President Richard Fisher, as evidenced in his vote to increase the federal funds rate in the June 25 meeting of the FOMC), something that will most likely come back to bite us in the ass. As Mr. Rogoff points out:

"...as goods prices rise, wage pressures will eventually follow. As Carmen Reinhart and I have shown in our research on the history of international financial crises, government in every corner of the world showed themselves perfectly capable of achieving very high rates of inflation long before they had the assistance of modern unions*." (*:See end of post for the research cited)

"...Inflation stabilisation cannot be indefinitely compromised to support bail-out activities. However convenient it may be to have several years of elevated inflation to help bail out homeowners and financial institutions, the gain has to be weighed against the long-run cost of re-anchoring inflation expectations later on."

We had a good run for a while, but now it's time to let things cool and restructure while we await the next economic boom. But let's not try to keep this thing going forever. It's time to buckle down and deal with reality. Instead of keeping lackluster business' alive and breathing by letting the federal government bail them out, we should let them fail, allowing the lesson to sink in that excessive risk has a cost that eventually gets paid. And instead of maintaining lax regulation on the financial industry, we should beef up oversight and regulations to prevent future occurrences of excessive risk tolerance in exchange for fat profits (and to prevent another future financial crisis). Continued bail outs will increase the federal governments liabilties and drive further devaluation of the dollar. Instead of trying to keep interest rates low (I say trying because that's exactly what is happening; real interest rates aren't responding like they used to with changes in the federal funds rate--> See Paul Krugman's post on this), let's start slowly bringing them back up to encourage less spending, thus reducing pressure on demand for resources and give the world some time to increase supply for essential commodities. I like that way Mr. Rogoff says it:

"For a myriad reasons, both technical and political, financial market regulation is never going to be stringent enough in booms. That is why it is important to be tougher in busts, so that investors and company executives have cause to pay serious attention to risks. If poorly run financial institutions are not allowed to close their doors during recessions, when exactly are they going to be allowed to fail?"

And it's a bit resonant of one of my previous posts, in the sense that he points out that U.S. has a "growth imperative" that leads to a rationalization of actions like tax rebates, dramatic interest rate cuts and financial institution bail-outs to stimulate demand and growth. He also thinks, as I do, that the good times must end for a while: "...policymakers must refrain from excessively expansionary macroeconomic policy at this juncture and accept the slowdown that must inevitably come at the end of such an incredible boom."

To bring everything to a close, the continued attempts to prevent growth from slowing are utlimately going to make the inevitable crash much worse than it could have been. Mr. Rogoff agrees:

"In policymaker's zealous attempts to avoid a plain vanilla supply shock recession, they are taking excessive risks with inflation and budget discipline that may ultimately lead to a much greater and more protracted downturn."
* This Time is Different: A Panoramic View of Eight Centuries of Financial Crises, NBER Working Paper 13882, March 2008

28 July 2008


Someone has stated the obvious:

"We are relearning an old lesson: The business cycle isn't dead. Prosperity's pleasures breed complacency and inspire mistakes that, in time, boomerang on financial markets, job creation and production. Just as expansions ultimately tend to self-destruct, so downswings tend to generate self-correcting forces. People pay down debts; pent-up demand develops; surviving companies expand."

24 July 2008


I was at Marginal Revolution and Tyler Cowen posted about "markets in everything" and a link to this story from the NY Times about the Chinese government buying silence from earthquake victims. I came across the following sentence in the Times story and it made me think:

"Most people, the government assumes, ultimately put profit before principle."

It's ironic; a communist government operating like a capitalist firm.

Something Fun

So I was looking at pictures of New York City on Flickr and the caption on one image referenced a stunt put on by a site called Improv Everywhere. It's quite an amusing distraction. I've read two so far, this one and this one. They're great.

22 July 2008


From my favorite newspaper...


Paul Krugman writes:

"These prolonged recession-like episodes probably reflect the changing nature of the business cycle. Earlier recessions were more or less deliberately engineered by the Federal Reserve, which raised interest rates to control inflation. Modern slumps, by contrast, have been hangovers from bouts of irrational exuberance — the savings and loan free-for all of the 1980s, the technology bubble of the 1990s and now the housing bubble."
"Ending those old-fashioned recessions was easy because all the Fed had to do was relent. Ending modern slumps is much more difficult because the economy needs to find something to replace the burst bubble."

Hopefully that something isn't another bubble. My previous post touches on unsustainable growth and the inevitable consequenses of it. Instead of having more frequent mild recessions we try to to stay pain free for as long as possible (doing anything necessary to achieve this goal) in the present even though ultimately we must come crashing down to reality. It just doesn't make sense to me.

21 July 2008


"...ours is a free-market system. More and more, our version of free markets holds that they are free only when asset values rise. When they fall, the markets must be managed." [From NY Times]
and from The American Prospect (thanks to a post at Marginal Revolution)...
"The decision to intervene against short-selling is completely inconsistent with the belief in the wisdom of the markets. Of course short-sellers can be wrong and depress stock prices more than is justified by fundamentals, but so what? The government doesn't intervene when it thinks investors have exaggerated the true value of a stock. The public has no more reason to fear under-valued stock prices than over-valued stock prices."
Growth, growth, growth. The government, business people, nearly everybody wants everything to be good all the time. But it just cannot be so. It seems like nearly everybody has forgotten about the fact that there is absolutely a business cycle that brings good times and bad times. And although we don't have to accept the bad times with no resistance or efforts to minimize the negative effects, we do need to accept the reality of the situation. Things will be tough for a while. Tough shit. Deal with it. Bailouts of Bear Stearns and potentially FannieMae and FreddieMac. Limiting short-selling by the SEC. Cutting the Federal Funds Rate drastically. We're doing everything we can to keep from hurting now. But eventually we will have to hurt. People either don't realize this or are very good at suppressing it...and it's just flat out amazing.


Here is a good article.

17 July 2008

Why didn't they do this from the start?

The American Securitization Forum has a plan to increase the supply of mortgage loans available and lower their cost by providing greater transparency in mortgage backed securities.

"Pools of mortgages, for example, could be structured so that all the loans
in them share many of the same traits. One pool might only contain loans from
prime borrowers who have fully documented their income and their assets, put
down a down payment of at least 20% and have credit scores of 720 or


"On the other hand, more risk-tolerant investors might prefer a piece of a pool featuring all subprime borrowers with low credit scores that would offer a higher rate of return. The key is that each of these investors would know what they are buying."

Why didn't they think of this years ago?

16 July 2008

Relationship advice from an economist

"In every long-term romantic situation, returns are greater when there is a monopoly. If you have to share your love with others, if you have to compete even after a brief while with others, forget the whole thing. You want to have monopoly bonds with your long-term lover. At least most situations work out better this way." - Ben Stein

Here is the full piece.

How to save the economy

From the New York Times:

"On Tuesday, Nancy Pelosi of California, the speaker of the House, and other House Democrats met with economists to draft another stimulus package, saying it was likely to include spending for roads, bridges, schools and other public facilities, as well as aid for states confronting smaller tax revenues in the face of the housing downturn."

"The White House and Congressional Republicans maintain that the best way to reinvigorate the economy is to adopt legislation to limit home foreclosures and expand domestic production of oil."

More spending seems to be the wrong solution to me. Continued dollar depreciation isn't going to slow inflation. I'm not quite sure what "expand domestic production of oil" means. I will assume the repeal of off-shore drilling bans, as curtailing additions to the strategic reserves seems to be neither a viable long-term solution nor a solution that has significant impact on oil prices given that only about 3 million barrels per month could be diverted to the market (in a very good month) [DOE SPR Data]. The United States consumes over 20 million barrels per day. Limiting home foreclosures might slow declining home prices, but they will still fall nonetheless and continue to cause problems for the financial markets. We're just going to have to ride this thing out.

15 July 2008


A cool piece about a high school student that taught his classmates in preparation for the AP economics exam.

"...socialism is alive and well in America."

Or so says Senator Jim Bunning, (R) Kentucky. Part of the Republican backlash against Mr. Paulson's propoesd changes to housing regulations.


I'm considering giving up video poker and trying InTrade, thanks to Joel Stein.

That 70's Economy?

Slow to little growth and rapidly rising inflation....are we headed for stagflation?

"...the Labor Department reported that wholesale prices had risen 1.8 percent in June, meaning that inflation rose in the 12 months at its fastest pace in more than a quarter-century."

More on stagflation: here and here

10 July 2008

Immigration: The Capitalist Way

Professor Gary Becker of the University of Chicago is thinking about immigration. He suggests an system of purchasing citizenship. I don't think it's a terrible idea. I don't know if it would make a huge impact on illegal immigration (esp. from Mexico), but I do think it would help get more highly skilled workers into the country who really want to come here and work, which would be a good thing.

09 July 2008

Private Roads

I was talking to a friend about this idea the other day. He thought I was nuts. I'm glad to see others think it may not be a bad idea.


So I got to see Milk at a pre-screening last night. What a fantastic movie! I didn't even know who Harvey Milk was prior to reading the concept sheet. He was a gay rights activist/politician in San Francisco who basically started a huge gay rights movement in Castro. I think it's a very inspiring story. The acting is top notch (esp. Sean Penn). All around just an excellent movie. When it comes out (no pun intended), GO SEE IT!

08 July 2008

Votes for sale

A 19 year old college student in Minneapolis is being charged with a felony after offering to sell his vote for the presidential election on eBay.
“We take it very seriously. Fundamentally, we believe it is wrong to sell your
vote,” said John Aiken, a spokesman for the office. “There are people that have
died for this country for our right to vote, and to take something that lightly,
to say, ‘I can be bought.’

I didn't know it was against the law to sell your vote. What's so wrong about that. I can sell my labor and my personal property, why can't I sell my vote? Can somebody elucidate on why selling your vote is considered such a heinous thing?

23 June 2008

Tips for saving gasoline

Here is an interesting post with some analysis of how to improve your gasoline mileage...

Inner Economist

If you're looking for an entertaining and interesting read, then you might want to check out Tyler Cowen's most recent book Discover Your Inner Economist. I read it over the weekend and thoroughly enjoyed it. It's more a book about life and how to make yourself a bit of a better person, and how you can use some simple economic principles to do so.

To bus or not to bus?

I've been rolling around the idea in my head of riding the CAT bus to work as a substitute for driving my 2000 Honda Civic about 40 miles round-trip each day. The expenditures on gas aren't affecting me too much (yet), but I'd like to save the money that I'm spending on gas and reduce some of my carbon emissions. Now I've come across this morsel of information that has really got me weighing the costs and benefits of not using my car for commuting to work.
The Internal Revenue Service allows businesses to invest funds, tax free, in
alternative transportation for employees. Currently, employers can provide up to
$115 a month in qualified transportation benefits. These can include van pools,
bus tickets and other mass-transit options.

And even if my employer isn't hip to paying for my transportation costs to get to and from work everyday, I can always try this:

If the employer can't afford to do that, another option that's available is
to implement a flex-spending plan for employee transportation.
Under this provision, employees can have up to $115 a month deducted, pretax, for
transportation expenses and another $200 a month can be deducted pretax for
parking expenses.

"That has no cost to the employer, but because it is pretax, that would
help employees," Thalacker said. "You don't see this used often. I've only had
one employer call me about that provision."

22 June 2008


If high oil prices persist, we could be seeing a large drop in world trade.
Paul Krugman thinks so...

21 June 2008

Micro Mania

An article in Time purports that the rapid growth in micro-finance could be the cause of future financial market turmoil.

Recent history says that when a financial trend gets popular, it gets riskier too. Think subprime mortgages.
Any lending venture involves a degree of risk, but the more I think about it I don't see "micro-finance" causing any "major" problems. The whole idea is to make small loans. Even if default rates skyrocket on these loans at some point in the future, there won't be billions of dollars at stake.

Related Links: Private Sector Development Blog, Marginal Revolution

19 June 2008

Take the good with the bad

High gas prices may be hurting your finances (I know they are impacting mine), but with some bad always comes some good.