I'm a day late with Loose Ends this week. I blame that on vacation. I'm frankly a bit behind on keeping up with the finer details of the news this past week - especially beyond the financial/economic world.
The G20 summit is set to begin later this week where world leaders will discuss the world's financial crisis. This will actually be pretty interesting to watch. The state of the U.S. Dollar as the world's reserve currency, international regulation, and the use of stimulus will all be potentially discussed.
We're coming off the heels of a few good weeks in the U.S. stock market. We'll see how that holds as we enter earnings season in several weeks. Between now and then, the market will move largely on political events or surprises from major banks.
Of course, today, we saw movement due in part to the U.S. auto industry. Obama and team have stated that the plans submitted by GM and Chrysler were not good enough. The administration put pressure on GM Chairman and CEO Rick Wagoner leading to his resignation today.
So, I'm left with more frustration and anger... and unfortunately left struggling to find words tonight - (and increasingly more lately in general).
This is a great example of the dangers of a powerful state. Did Wagoner deserve to be fired? I think so. But, I don't own GM stock. I'm not on the Board of GM. My opinion doesn't matter for any more than that. Last I checked, the same goes for Obama and the federal government. Wagoner's departure is bittersweet in this regard. If my taxes are going to be given to GM in any shape or form, then I suppose I'm glad Wagoner is out. But, the cost is great as this puts the government's power on center stage. Where does it end?
Oh yeah... The Fed officially began its program of quantitative easing and the U.K. had a failed auction of the Gilt - U.K. sovereign debt. This means that the government attempted to auction off a specified volume of bonds (40 year maturity in this case) and there were not enough bidders in the auction to meet the supply.
Monday, March 30, 2009
Friday, March 27, 2009
Creepy...
This is probably just my weirdness but every time I see Timothy Geithner testifying in a Congressional hearing, this image immediately pops into my head--
(Photo from startrek.com)
I know it's not very nice, but I see a very creepy resemblance...
(Image from pbs.org)
I also find it delightfully ironic that the Ferengi race (from Star Trek, the character above is a Ferengi named Quark who frequently appeared on DS9) is largely characterized as a race of merchants who are obsessed with profit above all else. Their religion is even based upon this principle--they offer prayers and offerings to a "Blessed Exchequer" and hope to enter the "Divine Treasury" in the afterlife. Ferengi live by the guidelines set forth in their "Rules of Acquisition" (there are 285) which are said to be divinely inspired; these include such gems as "once you have their money, you never give it back" and "never be afraid to mislabel a product." There was even an episode of Voyager that made reference to the Ferengi's "religious reverence" for Earth's Wall Street, where they routinely visit on pilgrimage to the "holy site of commerce and business."
Yikes...we'd better watch out...I'm starting to think Geithner is a Ferengi in disguise. :)
Tuesday, March 24, 2009
The Geithner Plan
Today, the details of Geithner's new plan to address the banks' toxic assets was released. He also penned an op-ed in the Wall Street Journal and appeared on CNBC (not sure of other media appearances). The U.S. Treasury website has also released a wide array of information regarding the plan - this is a good place to start if you want to read some of it.
Here are the basics. Private investors will compete in auctions to purchase the toxic - now called "legacy" - assets from financial institutions. The private investor will receive matching funds from the Treasury and a non-recourse loan from the FDIC as additional assistance. (The details are slightly different for "legacy loans" and "legacy securities" - my examples concentrate on the legacy loans. The legacy securities, which are the derivatives of the actual loans such as MBS, will receive loans from the Fed through the TALF program.) Recall that a non-recourse loan means that the borrower (the private investor) does not need to provide collateral. If the loan goes bad, the FDIC just loses the money.
So, let's take a look at a quick example of how this might play out. Let's say that Bank A is holding legacy loans of questionable value. For the sake of simplicity, let's normalize the original value of the loans to $1 - in other words, the net present value of the loans as they were written was $1. With the decline of the housing market, increasing foreclosures and mark-to-market accounting rules, Bank A has already written off 20 cents and hold the asset on its balance sheet at a value of 80 cents.
Bank A now contacts the FDIC who then organizes an auction. The FDIC will provide a loan at six times the amount of money coming in - and remember, the money coming in is a 50/50 split between the private investors and the Treasury (via TARP II). Here are some scenarios to consider as to what might happen:
Remember, Bank A had the loan on its books at 80 cents. There is little incentive for Bank A to accept a bid at any price which is too far below this price - if they do, then they immediately take that as a loss. If the loan sells for more than 80 cents, then Bank A immediately posts a profit. In both cases, Bank A gets a fresh cash infusion which could be used to make new loans (which is the hope of Geithner, Obama, et al). It will be interesting to see if banks are willing to sell at prices below their current marks. If so, we could see large short-term losses in the financial sector. If not, then either a) this plan won't work because the sales will not happen, or b) it implies that the sales are generally above current marks. Clearly the latter must be the hope of Geithner.
If we look at this option, then the only relevant scenario in the above chart is the first one where the investor puts up a whopping 6 cents which is matched with TARP funds and supplemented with a loan of 72 cents from the FDIC. At a purchase price of 84 cents, Bank A gets the cash and records a profit of 4 cents. Then, the investor crosses his fingers and watches the cash flow in. Clearly, the investor is hoping for a positive return which means that the true value (the amount cash ultimately collected against the loans discounted for time) would have to exceed 84 cents. If the investor loses, he only loses no more than his initial investment of 6 cents. The taxpayers could lose much more (28 cents under a scenario where the true value ends up at only 50 cents).
This program only works if the current value that the banks have marked these assets on the books is significantly below true value. Keep in mind that the true value will only be known once the loans have all been collected. This is the only scenario under which a) banks will sell, b) investors will jump in and buy the assets, and c) taxpayers remain whole.
Here are the basics. Private investors will compete in auctions to purchase the toxic - now called "legacy" - assets from financial institutions. The private investor will receive matching funds from the Treasury and a non-recourse loan from the FDIC as additional assistance. (The details are slightly different for "legacy loans" and "legacy securities" - my examples concentrate on the legacy loans. The legacy securities, which are the derivatives of the actual loans such as MBS, will receive loans from the Fed through the TALF program.) Recall that a non-recourse loan means that the borrower (the private investor) does not need to provide collateral. If the loan goes bad, the FDIC just loses the money.
So, let's take a look at a quick example of how this might play out. Let's say that Bank A is holding legacy loans of questionable value. For the sake of simplicity, let's normalize the original value of the loans to $1 - in other words, the net present value of the loans as they were written was $1. With the decline of the housing market, increasing foreclosures and mark-to-market accounting rules, Bank A has already written off 20 cents and hold the asset on its balance sheet at a value of 80 cents.
Bank A now contacts the FDIC who then organizes an auction. The FDIC will provide a loan at six times the amount of money coming in - and remember, the money coming in is a 50/50 split between the private investors and the Treasury (via TARP II). Here are some scenarios to consider as to what might happen:
Remember, Bank A had the loan on its books at 80 cents. There is little incentive for Bank A to accept a bid at any price which is too far below this price - if they do, then they immediately take that as a loss. If the loan sells for more than 80 cents, then Bank A immediately posts a profit. In both cases, Bank A gets a fresh cash infusion which could be used to make new loans (which is the hope of Geithner, Obama, et al). It will be interesting to see if banks are willing to sell at prices below their current marks. If so, we could see large short-term losses in the financial sector. If not, then either a) this plan won't work because the sales will not happen, or b) it implies that the sales are generally above current marks. Clearly the latter must be the hope of Geithner.
If we look at this option, then the only relevant scenario in the above chart is the first one where the investor puts up a whopping 6 cents which is matched with TARP funds and supplemented with a loan of 72 cents from the FDIC. At a purchase price of 84 cents, Bank A gets the cash and records a profit of 4 cents. Then, the investor crosses his fingers and watches the cash flow in. Clearly, the investor is hoping for a positive return which means that the true value (the amount cash ultimately collected against the loans discounted for time) would have to exceed 84 cents. If the investor loses, he only loses no more than his initial investment of 6 cents. The taxpayers could lose much more (28 cents under a scenario where the true value ends up at only 50 cents).
This program only works if the current value that the banks have marked these assets on the books is significantly below true value. Keep in mind that the true value will only be known once the loans have all been collected. This is the only scenario under which a) banks will sell, b) investors will jump in and buy the assets, and c) taxpayers remain whole.
Sunday, March 22, 2009
Loose Ends... Vol. XXXV
Greetings. I'm on vacation in Florida this week. I'll either post a lot or not so much - maybe somewhere in between. We'll see. I will note that I have not forgotten about some posts that I've discussed in the past as future topics. I do still plan to complete my series on the credit crisis by looking at the short term Treasuries market and subsequently looking at the relationships between LIBOR, the Fed funds rate and Treasuries. I'd be pleased if I got to that this week. Also, a while back I promised a look at Congressional voting patterns and categorizing members of Congress. This is still coming too. I did some work on this late last year which left me unsatisfied with the results... I'll get back to this after I finish up some of the financial stuff mentioned above.
Ok - so, looking back at the week... I wrote a post on AIG earlier today which was one of the items which occupied my thoughts this week. I frankly have been quite angry and disgusted over this whole mess. The government should have never got in to this mess. Now that it has, I have no sympathy for those firms who have taken the money - especially AIG and any other firm who is essentially owned by the government.
One of the biggest issues with this whole thing is that any firm which is considered to be a "systemic risk" seems to be destined for bailouts ad infinitum. AIG (or Fannie Mae, Freddie Mac, Citigroup) can essentially do whatever it wants until it is fully nationalized (i.e. owned and run by the government). All of the leverage and bargaining power rests in these firms since the government has played its hand. These firms will not fail.
When the AIG bonus situation percolated this week, Tim Geithner stated that he would withhold the equivalent amount (some $150M) from future bailout payments to AIG (typically on the order of $30-50B at a time). Now, think about this. First, the bonuses represent no more than 0.5% of any single bailout that AIG has received. Second, I thought we were giving bailout funds to the extent absolutely necessary to keep AIG alive. If any amount is held back, would that cause AIG to fail. If not, then why are we giving them that much in the first place? And we can't give them less or else they fail and we have a global financial catastrophe.
Ok - I really am sick of AIG.
*****
A little over a week ago, I wrote an article on earmarks. Ron Paul (R-TX) defended his position on his official Congressional website for his constituents and anyone else who wants to listen/read. Have a look here.
*****
Good night.
Ok - so, looking back at the week... I wrote a post on AIG earlier today which was one of the items which occupied my thoughts this week. I frankly have been quite angry and disgusted over this whole mess. The government should have never got in to this mess. Now that it has, I have no sympathy for those firms who have taken the money - especially AIG and any other firm who is essentially owned by the government.
One of the biggest issues with this whole thing is that any firm which is considered to be a "systemic risk" seems to be destined for bailouts ad infinitum. AIG (or Fannie Mae, Freddie Mac, Citigroup) can essentially do whatever it wants until it is fully nationalized (i.e. owned and run by the government). All of the leverage and bargaining power rests in these firms since the government has played its hand. These firms will not fail.
When the AIG bonus situation percolated this week, Tim Geithner stated that he would withhold the equivalent amount (some $150M) from future bailout payments to AIG (typically on the order of $30-50B at a time). Now, think about this. First, the bonuses represent no more than 0.5% of any single bailout that AIG has received. Second, I thought we were giving bailout funds to the extent absolutely necessary to keep AIG alive. If any amount is held back, would that cause AIG to fail. If not, then why are we giving them that much in the first place? And we can't give them less or else they fail and we have a global financial catastrophe.
Ok - I really am sick of AIG.
*****
A little over a week ago, I wrote an article on earmarks. Ron Paul (R-TX) defended his position on his official Congressional website for his constituents and anyone else who wants to listen/read. Have a look here.
*****
Good night.
I'm Sick of AIG
This week has featured a lot of discussion on AIG. There is widespread outrage over the payments of bonuses to employees. There is finger-pointing and flip-flopping regarding who knew what and when in regards to the bonuses. We have the House and the Senate proposing and passing legislation to address the bonus issue. AIG CEO Edward Liddy testified before the House Financial Services subcommittee on Capital Markets. Obama and team have been making statements which appear, at times, to be inconsistent... I'm pretty much spent on the issue, but will offer my thoughts.
I have not been able to find a clean, clear and accurate report of what these bonuses are all about. Certainly, some portion of these were so-called retention bonuses. I've read differing reports and opinions on the exact nature of these payments. In one version, these were payments which were paid to AIG employees to stay on staff for a period of time while the company begins down its path of controlled destruction. This makes sense to me - especially for certain employees. Some useful contributors may choose to cut their losses, quit or pursue early retirement. It may be worthwhile to entice them to help clean up the mess with a bonus payment.
The other version I have heard of this is that these were negotiated well before the federal bailouts. Many of the employees in the the financial division of AIG which caused so much of the problem were paid largely in bonus compensation in the "good years" when CDS seemed like great products. When the economy began to turn sour and these financial instruments began to lose money, AIG took the position that these were extraordinary circumstances and not the fault of the individual employee. So, they wrote a contract to protect the bonuses at a certain level despite actual performance.
Both of these are plausible explanations because I've witnessed both of them first hand in my own work life. Many people will argue (quite vociferously) that these employees do not deserve any sort of bonus. Why should we pay the people who destroyed the economy - or at least destroyed AIG - to stick around? Fair point. However, let's remember that not all employees are created equal. Also, despite engaging in a practice which has led to the destruction of the company, these may well be some of the only qualified individuals to help destroy the cancer itself. Further, it is also very likely that senior management and even the executive leadership and Board of AIG did not see this as the fault of the employees who we now say created the mess. This is precisely the same argument that many people are using to say that we should not punish the delinquent homeowners.
Regardless, the people are angry. And their anger is all over the place. Personally, I think most of the anger is misplaced, but this is due to the myriad of opinions, stories and rhetoric out there trying explain this mess. At the end of the day, my anger traces back to the government interfering in this mess in the first place. A disorderly collapse of AIG may well have caused a very ugly situation back in September. But, now we are treated the politicization of every action of this company as it tries to destroy itself. Ed Liddy's opening remarks and various appendices can be found here and provide interesting reading material.
While most of America was concerned with AIG bonuses, the real AIG story this week was the release of details of how AIG has used the money it has received from the government thus far. The details can be found in Liddy's testimony linked above. In summary, a whole lot of banks have received money as payments from AIG on various contracts and financial derivatives. This includes tens of billions of dollars to many foreign banks. It also names the largest recipient as Goldman Sachs ($12.9B), who has already receives billions in TARP money - and not so coincidentally is the former employer of Henry Paulson, Robert Rubin, John Corzine, Jim Cramer, Erin Burnett, Josh Bolten, George H.W. Bush IV, Neel Kashkari, Robert Zoellick, and many others in the government and in media. I have a hypothesis that "too big to fail" means "would cause Goldman Sachs to lose money."
The story doesn't quite end here. Now Congress has to act. So, the House quickly drafted and passed H.R. 1586. Note that the bill was introduced on March 18 and passed on March 19. No matter what you might think of the Constitutional or ethical merit of this bill, it is ludicrous to introduce and pass legislation so quickly without time for sufficient debate and review. At least this bill is short enough that it is plausible that most members actually read the full text.
That's all for now... I'll leave you with a link to a statement in favor of the legislation by libertarian-friendly Rep. Tom McClintock (R-CA).
I have not been able to find a clean, clear and accurate report of what these bonuses are all about. Certainly, some portion of these were so-called retention bonuses. I've read differing reports and opinions on the exact nature of these payments. In one version, these were payments which were paid to AIG employees to stay on staff for a period of time while the company begins down its path of controlled destruction. This makes sense to me - especially for certain employees. Some useful contributors may choose to cut their losses, quit or pursue early retirement. It may be worthwhile to entice them to help clean up the mess with a bonus payment.
The other version I have heard of this is that these were negotiated well before the federal bailouts. Many of the employees in the the financial division of AIG which caused so much of the problem were paid largely in bonus compensation in the "good years" when CDS seemed like great products. When the economy began to turn sour and these financial instruments began to lose money, AIG took the position that these were extraordinary circumstances and not the fault of the individual employee. So, they wrote a contract to protect the bonuses at a certain level despite actual performance.
Both of these are plausible explanations because I've witnessed both of them first hand in my own work life. Many people will argue (quite vociferously) that these employees do not deserve any sort of bonus. Why should we pay the people who destroyed the economy - or at least destroyed AIG - to stick around? Fair point. However, let's remember that not all employees are created equal. Also, despite engaging in a practice which has led to the destruction of the company, these may well be some of the only qualified individuals to help destroy the cancer itself. Further, it is also very likely that senior management and even the executive leadership and Board of AIG did not see this as the fault of the employees who we now say created the mess. This is precisely the same argument that many people are using to say that we should not punish the delinquent homeowners.
Regardless, the people are angry. And their anger is all over the place. Personally, I think most of the anger is misplaced, but this is due to the myriad of opinions, stories and rhetoric out there trying explain this mess. At the end of the day, my anger traces back to the government interfering in this mess in the first place. A disorderly collapse of AIG may well have caused a very ugly situation back in September. But, now we are treated the politicization of every action of this company as it tries to destroy itself. Ed Liddy's opening remarks and various appendices can be found here and provide interesting reading material.
While most of America was concerned with AIG bonuses, the real AIG story this week was the release of details of how AIG has used the money it has received from the government thus far. The details can be found in Liddy's testimony linked above. In summary, a whole lot of banks have received money as payments from AIG on various contracts and financial derivatives. This includes tens of billions of dollars to many foreign banks. It also names the largest recipient as Goldman Sachs ($12.9B), who has already receives billions in TARP money - and not so coincidentally is the former employer of Henry Paulson, Robert Rubin, John Corzine, Jim Cramer, Erin Burnett, Josh Bolten, George H.W. Bush IV, Neel Kashkari, Robert Zoellick, and many others in the government and in media. I have a hypothesis that "too big to fail" means "would cause Goldman Sachs to lose money."
The story doesn't quite end here. Now Congress has to act. So, the House quickly drafted and passed H.R. 1586. Note that the bill was introduced on March 18 and passed on March 19. No matter what you might think of the Constitutional or ethical merit of this bill, it is ludicrous to introduce and pass legislation so quickly without time for sufficient debate and review. At least this bill is short enough that it is plausible that most members actually read the full text.
That's all for now... I'll leave you with a link to a statement in favor of the legislation by libertarian-friendly Rep. Tom McClintock (R-CA).
Sunday, March 15, 2009
Loose Ends... Vol. XXXIV
I think one of the most interesting subplots of the financial crisis surfaced this week courtesy of John Stewart and The Daily Show. Stewart has been critical of CNBC and, in particular, Jim Cramer, in their coverage of the markets and the crisis. I have not watched all the clips (feel free to search for them on YouTube and/or visit The Daily Show website), but what I have seen is both entertaining and relevant.
This little feud points to two interesting issues in my mind. First of all, I think Stewart's characterization of CNBC and Cramer is quite fair. I watch CNBC a lot these days, and I did not watch them much in the past. But, Cramer and the rest of the crew - from analysts to anchors - are quite often nothing more than cheerleaders. Is this bad? Well, it depends on your perspective. What service is CNBC providing: investment and financial advice or a medium for advertisements? This leads me to my second point. There was widespread criticism of Stewart on both CNBC and MSNBC (and probably other "news" outlets as well). The basic attack was that Stewart is nothing more than a comedian. He is not a journalist and does not not put himself out there with opinions and predictions like the respectable news and financial analysts in the mainstream media.
Frankly, this is the type of hypocrisy that really bothers me when it comes to the mainstream media. There are (probably) plenty of legitimate journalists in the media. But, at the end of the day, it is ratings - and thus ad revenues - that the media is seeking. This is no different than John Stewart or any other television show. News outlets like CNN, MSNBC and Fox News are both looking for ratings and sacrifice the high road of journalistic integrity to do so.
This provides a nice segway to another story that surfaced this week which is an interesting subplot to the crisis (in fact, in my opinion, this might really get at the heart of the matter - we'll save that for another post). Jack Welch, famed former CEO of GE, the parent company of NBC, gave an interview to the Financial Times this week. In the interview, Welch stated that "shareholder value is the dumbest idea in the world." Why is this important?
The concept of "shareholder value" as a business strategy is attributed to Jack Welch based on a speech he gave upon becoming GE CEO in 1981 and his actions as CEO for the next twenty years. Now, almost thirty years after the speech, he says it's dumb. This strategy has been central to corporate America and Wall Street for quite some time now. The concept is that the role of a public company is to deliver value to its shareholders as its ultimate goal. This is done by constant focus on the stock price. I'll save a lot of my thoughts on this for another post, but I believe that this plays a significant role in the crisis we face today.
That's all for tonight...
This little feud points to two interesting issues in my mind. First of all, I think Stewart's characterization of CNBC and Cramer is quite fair. I watch CNBC a lot these days, and I did not watch them much in the past. But, Cramer and the rest of the crew - from analysts to anchors - are quite often nothing more than cheerleaders. Is this bad? Well, it depends on your perspective. What service is CNBC providing: investment and financial advice or a medium for advertisements? This leads me to my second point. There was widespread criticism of Stewart on both CNBC and MSNBC (and probably other "news" outlets as well). The basic attack was that Stewart is nothing more than a comedian. He is not a journalist and does not not put himself out there with opinions and predictions like the respectable news and financial analysts in the mainstream media.
Frankly, this is the type of hypocrisy that really bothers me when it comes to the mainstream media. There are (probably) plenty of legitimate journalists in the media. But, at the end of the day, it is ratings - and thus ad revenues - that the media is seeking. This is no different than John Stewart or any other television show. News outlets like CNN, MSNBC and Fox News are both looking for ratings and sacrifice the high road of journalistic integrity to do so.
This provides a nice segway to another story that surfaced this week which is an interesting subplot to the crisis (in fact, in my opinion, this might really get at the heart of the matter - we'll save that for another post). Jack Welch, famed former CEO of GE, the parent company of NBC, gave an interview to the Financial Times this week. In the interview, Welch stated that "shareholder value is the dumbest idea in the world." Why is this important?
The concept of "shareholder value" as a business strategy is attributed to Jack Welch based on a speech he gave upon becoming GE CEO in 1981 and his actions as CEO for the next twenty years. Now, almost thirty years after the speech, he says it's dumb. This strategy has been central to corporate America and Wall Street for quite some time now. The concept is that the role of a public company is to deliver value to its shareholders as its ultimate goal. This is done by constant focus on the stock price. I'll save a lot of my thoughts on this for another post, but I believe that this plays a significant role in the crisis we face today.
That's all for tonight...
Geithner's Inability to Tell the Truth
I was watching Tim Geithner's testimony before the Senate Budget Committee earlier this week and found his answers to some questions to be simply infuriating. The replay of this hearing is on CSPAN right now and since I have the laptop in my lap, I felt the need to address this. It is not atypical for witnesses to dance around when answering questions. In fact, the ability to say a lot of words without saying anything of substance is apparently one of the skills most admired in Washington. There is one particular exchange which is most illustrative of the phenomenon.
Senator Lindsey Graham (R-SC) is asking the questions. You can view the entire hearing here - this particular exchange begins at 103:17 on the timer. Graham questions Geithner on the assumptions in the FY2010 budget which was recently released by the Obama administration. In particular, he challenges the assumption of the unemployment rate in 2009. Graham references that the budget assumes that unemployment will "peak" at a rate of 8.1% in 2009 and asks Geithner if he still feels that this is a valid assumption. Geithner dances around the question with politi-speak, Graham tries to pin him down... more dancing... and we move on without an answer.
Now, Graham's assertion that the budget calls for the unemployment rate to "peak" at 8.1% could be misleading depending on your interpretation of the peak. According to the budget (see Table S.8), 2009 will have an average unemployment rate of 8.1% which will be the peak year for the average. The CBO and Blue Chip Consensus estimates both have (average) unemployment peaking in 2010 (at 9.0% and 8.7% respectively). But whether you define peak as the highest monthly level or the highest yearly average, we seem to have a problem. The reason that this is a clear evasion on the behalf of Geithner is that unemployment is already at 8.1%. For the budget estimate to hold up, unemployment would clearly need to turnaround this year or stay flat. That seems unlikely and Geithner is unwilling to admit that under oath.
Senator Lindsey Graham (R-SC) is asking the questions. You can view the entire hearing here - this particular exchange begins at 103:17 on the timer. Graham questions Geithner on the assumptions in the FY2010 budget which was recently released by the Obama administration. In particular, he challenges the assumption of the unemployment rate in 2009. Graham references that the budget assumes that unemployment will "peak" at a rate of 8.1% in 2009 and asks Geithner if he still feels that this is a valid assumption. Geithner dances around the question with politi-speak, Graham tries to pin him down... more dancing... and we move on without an answer.
Now, Graham's assertion that the budget calls for the unemployment rate to "peak" at 8.1% could be misleading depending on your interpretation of the peak. According to the budget (see Table S.8), 2009 will have an average unemployment rate of 8.1% which will be the peak year for the average. The CBO and Blue Chip Consensus estimates both have (average) unemployment peaking in 2010 (at 9.0% and 8.7% respectively). But whether you define peak as the highest monthly level or the highest yearly average, we seem to have a problem. The reason that this is a clear evasion on the behalf of Geithner is that unemployment is already at 8.1%. For the budget estimate to hold up, unemployment would clearly need to turnaround this year or stay flat. That seems unlikely and Geithner is unwilling to admit that under oath.
Saturday, March 14, 2009
Ron Paul and Barack Obama on Earmarks
Earmarks have come to be recognized as the epitome of government waste in Washington. This has been a growing phenomenon over the last several years, but reached new heights on the campaign trail over the last two years. Both John McCain (R-AZ) and Barack Obama criticized earmarks while running for President.
I used the web archives to grab quotes from the pages of both McCain and Obama while they were seeking the Presidency. McCain's site had the following:
As has been noted in the news this past week, Obama has signed the latest Omnibus Appropriations Act which featured 8,814 earmarks according to the group Taxpayers for Common Sense. Obama made the following statements this week upon his signing of the legislation:
According to the Taxpayers for Common Sense, Paul has eleven "solo earmarks" totaling nearly $15M and thirty-three "solo and with other members" totaling nearly $64M. In fact, Paul is one of the biggest "offenders" when it comes to earmarks in this bill. (Only 57 of 451 members and former members of the House have zero earmarks.) So, how does Paul, one of the most outspoken fiscal conservatives in Washington, defend this? Well, Paul spoke on the House floor to address this issue (full text available linking here and here). Here are some highlights:
Does this make Ron Paul a hypocrite? It's hard to say. His arguments for earmarks do not contain contradictions, nor does his general stance on spending. It is not at all uncommon for members of Congress who oppose legislation to insert provisions or propose amendments to make the legislation "less bad" in their view. It seems like a bit of a dirty trick in some ways, but that's part of the game.
I used the web archives to grab quotes from the pages of both McCain and Obama while they were seeking the Presidency. McCain's site had the following:
As president, John McCain will work to ensure that money spent by Congress, and contributed by hardworking American taxpayers, is used wisely and prudently on legitimate national priorities, not squandered on wasteful pet projects and special interest earmarks...And Barack Obama said this:
Year after year, powerful members of Congress divert taxpayer dollars to special interest pet projects with little or no national value...
Every dollar irresponsibly spent by Congress is a dollar diverted from pressing national priorities including lowering the tax burden on working Americans, supporting the men and women fighting the war on terror, making good on the nation's financial commitments at home, including to senior citizens, and paying down the national debt.
Obama introduced and passed bipartisan legislation that would require more disclosure and transparency for special-interest earmarks. Obama believes that spending that cannot withstand public scrutiny cannot be justified. Obama will slash earmarks to no greater than year 2001 levels and ensure all spending decisions are open to the public.Obama also joined McCain and other Senators to explicitly call for a one year moratorium on earmarks early last year in an amendment to the Budget resolution for FY2009. This amendment, sponsored by Jim DeMint (R-SC), failed to pass on a vote of 29-71. Obama was one of only five Democrats to support the amendment. The other Democrats who joined him were Clinton (D-NY), McCaskill (D-MO), Feingold (D-WI), and Bayh (D-IN).
As has been noted in the news this past week, Obama has signed the latest Omnibus Appropriations Act which featured 8,814 earmarks according to the group Taxpayers for Common Sense. Obama made the following statements this week upon his signing of the legislation:
Now, let me be clear: Done right, earmarks have given legislators the opportunity to direct federal money to worthy projects that benefit people in their districts, and that's why I've opposed their outright elimination...And this brings me to Ron Paul (R-TX)...
But the fact is that on occasion, earmarks have been used as a vehicle for waste, and fraud, and abuse...
I recognize that Congress has the power of the purse. As a former senator, I believe that individual members of Congress understand their districts best. And they should have the ability to respond to the needs of their communities.
According to the Taxpayers for Common Sense, Paul has eleven "solo earmarks" totaling nearly $15M and thirty-three "solo and with other members" totaling nearly $64M. In fact, Paul is one of the biggest "offenders" when it comes to earmarks in this bill. (Only 57 of 451 members and former members of the House have zero earmarks.) So, how does Paul, one of the most outspoken fiscal conservatives in Washington, defend this? Well, Paul spoke on the House floor to address this issue (full text available linking here and here). Here are some highlights:
It's very popular today to condemn earmarks... even if you voted against all the earmarks... you don't save any money... that money then goes to the executive branch... [Congress is] supposed to tell the people how we are spending the money... Earmarks really allow transparency, and we know exactly where the money is being spent... what we need are more earmarks.Paul goes on in his speech to discuss the lack of transparency in the creation and spending of money by the Fed. He raises some interesting and fundamental issues. The Constitution grants Congress the power to tax and spend. While Paul clearly has issue with the scope of spending by the Federal government both in terms of volume and purpose, he is looking to the Constitution to support his earmarks. But, it is also interesting to note that Paul voted against the Omnibus Appropriations Act along with all but sixteen Republicans - including some of the other most prolific GOP earmarkers. The full list of earmarks can be found for download here.
Does this make Ron Paul a hypocrite? It's hard to say. His arguments for earmarks do not contain contradictions, nor does his general stance on spending. It is not at all uncommon for members of Congress who oppose legislation to insert provisions or propose amendments to make the legislation "less bad" in their view. It seems like a bit of a dirty trick in some ways, but that's part of the game.
Thursday, March 12, 2009
I Sure Hope PM Brown Likes Movies
While watching Glenn Beck on Monday, I learned an interesting news tidbit that I really haven't heard too much about elsewhere or since. British Prime Minister Gordon Brown visited Washington last week--his first visit (also the first of any world leader) to the White House since Obama took office. Since Theodore Roosevelt and Lord Salisbury crafted the Hay-Pauncefote Treaty in 1901, the U.S. and Great Britain are said to share in a "special relationship" that has typically been "on display" when the leader of one nation visits the other...it seems like it has developed into a rather ritualistic affair, of course most diplomatic visits probably are.
The treatment of PM Brown by Obama has already been widely criticized in the British media for its "coolness"--he broke tradition by not posing for a photo in front of the U.S. and UK flags with Brown; the customary press conference on the White House lawn was cancelled and replaced with a small affair; Obama did not invite Brown to Camp David, etc. While I can certainly understand how there might be some hurt feelings if these things are true since, whether one likes it or not, "ceremony" is important. What I found most interesting, however, were the reports of the traditional "exchange of gifts" between the Obamas and the Browns. I suppose it makes perfect sense that there would be such an exchange, not only between the U.S. and the UK, but also during any such visit. The selection of a gift is important, even more so I imagine if you are the leader of a country. Choosing the "wrong" gift could anger or embarrass the givee and reflects poorly on the giver. Now, as one would imagine, the types of gifts traditionally given in such exchanges are often rather grand and meaningful, showing that the giver took time and care to select them.
So...what gifts were exchanged between Obama and Brown during this visit? Here is what was given to the Obamas:
**An ornamental pen holder made of the timbers of the Victorian anti-slave ship HMS Gannet (an aside--there is a desk in the Oval Office made of wood from the Gannet's sister ship, HMS Resolute, that has been there since 1880)
**A framed commission of the above-mentioned HMS Resolute
**A first edition of the seven-volume biography of Winston Churchill by Sir Martin Gilbert
**The Obama children, Sasha and Malia, were each given an outfit from a fashionable British store called TopShop and a collection of six British children's books which have not yet been published in the U.S.
Whoever it was that actually chose/purchased these gifts, it is clear that care and thought was put into them...they were most certainly intended to be "special" to the recipients. Well then, one can only imagine then what sorts of gifts Obama chose to give (although, I admit it would be hard to beat the fur-lined leather bomber jacket that George W. Bush gave to Brown, who apparently subsequently refused it), right?
Well, not exactly...Obama chose to give Prime Minister Brown a box set of 25 "classic" American DVDs. Yup...that's right...granted, Obama reportedly specially commissioned the American Film Institute to produce this box set but c'mon...this is like the lame cop-out gift that you buy for your uncle because you can't figure out what else to get him. It would perhaps make a bit more sense if Brown was known as being a film buff, but he's not. Here's what was included in the set, since I'm sure you'll be curious:
Citizen Kane, The Godfather, Casablanca, Raging Bull, Singin' in the Rain, Gone With the Wind, Lawrence of Arabia, Schindler's List, Vertigo, The Wizard of Oz, City Lights, The Searchers, Star Wars: Episode IV, Psycho, 2001: A Space Odyssey, Sunset Boulevard, The Graduate, The General, On the Waterfront, It's a Wonderful Life, Chinatown, Some Like It Hot, The Grapes of Wrath, ET: The Extra-Terrestrial and To Kill a Mockingbird.
To make matters worse, the gift the Obamas presented to the Browns for their children (they have 2 sons--John and Fraser)--2 plastic models of the presidential helicopter, Marine One, from the White House gift shop. Seriously??!! I don't know about you, but I find this terribly embarrassing. You may think that the whole idea of "ritualistic" gift-giving is stupid or superficial, but I think part of good diplomacy is making a good first impression and nurturing a good personal relationship. I don't think that Obama got off to a good start with this one; if he didn't pick the stuff out, he seemed to think it was ok enough to give anyway. So, either he's the dunce or his staff is...neither is particularly good. I mean, at least they could have given Blu-Rays!
Just for fun--here's the jacket from W (photo from the UK Telegraph)
Sunday, March 8, 2009
Loose Ends... Vol. XXXIII
A few weeks ago, city-county councilor Ed Coleman (of Indianapolis/Marion County) left the Republican Party to formally join the Libertarian Party. Coleman is now one of the highest ranking Libertarians in public office in the entire country. Some people may feel that this defection is not a good thing. I think it is debatable. Do our elected officials represent us as a member of a party? Or do they represent us as individuals? It is an interesting question. The leadership of the city-county council have decided that party is more important. Coleman has now been stripped of his committee assignments as punishment for his defection.
*****
The stock market continues to fall and fall quickly. We are quickly approaching my previously predicted range of 600-640 on the S&P 500. It is not happening in the way in which I thought it would happen. At these prices, Obama has decided that it's time for the market to stop sliding:
*****
In the midst of TARPs and bailouts, stimulus packages and housing plans, the matter of "normal spending" has not been in the news. Well, this week the Omnibus Appropriations Act of 2009 was the matter of debate in the Senate. The bill passed the House on February 25th, but it has stalled in the Senate - largely over pork. Senator Evan Bayh (D-IN) wrote an op-ed piece in the Wall Street Journal this week urging the Senate and/or Obama to reject the bill. We should see a vote this week.
*****
The stock market continues to fall and fall quickly. We are quickly approaching my previously predicted range of 600-640 on the S&P 500. It is not happening in the way in which I thought it would happen. At these prices, Obama has decided that it's time for the market to stop sliding:
On the other hand, what you're now seeing is profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal if you've got a long-term perspective on it. I think that consumer confidence -- as they see the American Recovery and Reinvestment Act taking root, businesses are starting to see opportunities for investment and potential hiring, we are going to start creating jobs again.Obama should have brushed up on his Wall Street terminology before spouting off... he meant to say "price to earnings ratio" - I'm sure that helped with investor confidence.
*****
In the midst of TARPs and bailouts, stimulus packages and housing plans, the matter of "normal spending" has not been in the news. Well, this week the Omnibus Appropriations Act of 2009 was the matter of debate in the Senate. The bill passed the House on February 25th, but it has stalled in the Senate - largely over pork. Senator Evan Bayh (D-IN) wrote an op-ed piece in the Wall Street Journal this week urging the Senate and/or Obama to reject the bill. We should see a vote this week.
Saturday, March 7, 2009
Potpourri
Every once in a while on Jeopardy!, they will have a category of questions on miscellaneous topics and I believe the category is usually called "Potpourri." This was the "inspiration" for the title of this post, as there have been a number of things I've been wanting to write about for the past week or so but haven't had time (it's hard working and taking care of a toddler when your husband's out of town). I was reminded of this when I opened my notebook earlier this morning and happened to shuffle past the page containing my hastily scribbled list of things I wanted to write about..this is a running list I've been keeping so that I don't forget something that happens to strike me (for some odd reason, this usually happens while I'm driving). If I'm being realistic with myself, there's no way now that I'll be able to devote an entire post to each of these topics so instead, I'm just going to mention them briefly and let you all follow up or comment as you are so inspired.
#1 -- Last Tuesday (February 24th), NASA launched their Orbiting Carbon Observatory (OCO) from Vandenberg Air Force Base in California. The satellite was supposed to orbit 438 miles above the Earth and take detailed measurements of the levels of carbon dioxide in the atmosphere. Unfortunately, only 3 minutes after the satellite launched, NASA scientists noticed that the Taurus XL rocket that was supposed to carry the satellite into space has failed to shed a protective component that should have separated after the rocket reached space. The failure of this piece to disengage itself from the rocket made it unable to make orbit, as the extra weight did not allow for the satellite to reach the speed it needed. As a result, the satellite crashed into the ocean near Antarctica about 5 minutes after its launch. Ok, so what, right? The cost of this crashed satellite was $273.4 million dollars!!! Yep, several years of work and research, along with $270 million dollars spent (courtesy of U.S. taxpayers), all for nothing. It's the same as if they just took that money, put it in a big pile and lit it on fire. I can think of a million better ways that money could have been spent. And now, NASA has formed a board for investigating what went wrong with the satellite which will doubtless waste more money and probably eventually lead to recommendations for building another satellite.
#2 -- This Tuesday (March 3rd), Peter Orszag, the Director of the Office of Management and Budget (OMB), gave the Fiscal Year 2010 Budget Overview to the House Budget Committee. There was nothing terribly shocking in Orszag's presentation on the budget--spend, spend, spend being the main theme. What I thought was worth mentioning though was hearing uber-nerd Orszag sound rather ridiculous by using a country music quote toward the end of his opening statement. From what I've read, apparently he is a country music fan but still, he sounded really silly. Here he quoted country singer Toby Keith in saying "there ain't no right way to do the wrong thing." The link to the full presentation from C-SPAN is below, this particular quote is at 18:16.
http://www.c-spanarchives.org/library/index.php?main_page=product_video_info&products_id=284394-1&showVid=true
I first heard this quote on the radio and the next day, again on the radio, heard Orszag discussing the same budget before the House Ways & Means Committee where he quoted another country duo, Montgomery Gentry, saying "This ain't about easy -- it's about tough." Unfortunately, I haven't been able to find a video of this particular hearing.
#3 -- Quite a few weeks ago (as I'm looking it up now, I see that it was on February 10th) I was watching C-SPAN fairly late at night (embarrassingly, this is not uncommon for me) and happened to catch 60 minutes of "Special Order" floor speech time controlled by the Progressive Caucus in the House. Being that this was supposedly live at 11pm, it was basically just Rep. Keith Ellison (D-MN) and Rep. Lynn Woolsey (D-CA) talking back and forth to each other in an empty room. They were talking about H.R. 1, the American Recovery and Reinvestment Bill of 2009, and how they were "concerned" about the cuts the Senate had made from the House version of the bill. Below is an excerpt from Rep. Ellison that came toward the middle of the 60 minutes; it caught my attention at the time and I will quote it here without comment, as I'd really like to get some thoughts from all of you out there reading this first.
#4 - Finally (this is obviously much belated), on Inauguration Day I was prompted by strange comment made by Sam Donaldson involving the fence around the White House grounds and something about "Calvin Coolidge's goat" grazing on the White House lawn to read a bit more about President Coolidge. Suffice to say, I read enough that I became interested enough to want to do deeper research on Coolidge and his administration and would like to devote a post to this topic sometime in the future. I wanted to mention though, since I find it quite fascinating and entertaining, that I also learned that President Coolidge and his wife, Grace, were great lovers of animals and kept quite an array of "pets" both in the White House and before. This included several cats, 10+ dogs, several birds (including a mockingbird and a troupial--a tropical bird from South America), rabbits, a bear, a pair of lions (which they named Tax Reduction and Budget Bureau), a small hippo, a wallaby, a duiker, 13 Pekin ducks, a pair of rock bass (sent to them as a gift intended to be eaten; instead, the Coolidges kept them for a while in their bathtub in the White House), and a raccoon named Rebecca who apparently enjoyed playing in the water in the bathtub with a cake of soap. Apparently, the Coolidges ended up giving some of the animals to the Rock Creek Zoo (now the National Zoo) in hopes they would have a better environment. Anyway, here's a link to a story written by historian David Pietrusza about the Coolidges and their pets that's quite interesting...something you don't hear about in history books.
#1 -- Last Tuesday (February 24th), NASA launched their Orbiting Carbon Observatory (OCO) from Vandenberg Air Force Base in California. The satellite was supposed to orbit 438 miles above the Earth and take detailed measurements of the levels of carbon dioxide in the atmosphere. Unfortunately, only 3 minutes after the satellite launched, NASA scientists noticed that the Taurus XL rocket that was supposed to carry the satellite into space has failed to shed a protective component that should have separated after the rocket reached space. The failure of this piece to disengage itself from the rocket made it unable to make orbit, as the extra weight did not allow for the satellite to reach the speed it needed. As a result, the satellite crashed into the ocean near Antarctica about 5 minutes after its launch. Ok, so what, right? The cost of this crashed satellite was $273.4 million dollars!!! Yep, several years of work and research, along with $270 million dollars spent (courtesy of U.S. taxpayers), all for nothing. It's the same as if they just took that money, put it in a big pile and lit it on fire. I can think of a million better ways that money could have been spent. And now, NASA has formed a board for investigating what went wrong with the satellite which will doubtless waste more money and probably eventually lead to recommendations for building another satellite.
#2 -- This Tuesday (March 3rd), Peter Orszag, the Director of the Office of Management and Budget (OMB), gave the Fiscal Year 2010 Budget Overview to the House Budget Committee. There was nothing terribly shocking in Orszag's presentation on the budget--spend, spend, spend being the main theme. What I thought was worth mentioning though was hearing uber-nerd Orszag sound rather ridiculous by using a country music quote toward the end of his opening statement. From what I've read, apparently he is a country music fan but still, he sounded really silly. Here he quoted country singer Toby Keith in saying "there ain't no right way to do the wrong thing." The link to the full presentation from C-SPAN is below, this particular quote is at 18:16.
http://www.c-spanarchives.org/library/index.php?main_page=product_video_info&products_id=284394-1&showVid=true
I first heard this quote on the radio and the next day, again on the radio, heard Orszag discussing the same budget before the House Ways & Means Committee where he quoted another country duo, Montgomery Gentry, saying "This ain't about easy -- it's about tough." Unfortunately, I haven't been able to find a video of this particular hearing.
#3 -- Quite a few weeks ago (as I'm looking it up now, I see that it was on February 10th) I was watching C-SPAN fairly late at night (embarrassingly, this is not uncommon for me) and happened to catch 60 minutes of "Special Order" floor speech time controlled by the Progressive Caucus in the House. Being that this was supposedly live at 11pm, it was basically just Rep. Keith Ellison (D-MN) and Rep. Lynn Woolsey (D-CA) talking back and forth to each other in an empty room. They were talking about H.R. 1, the American Recovery and Reinvestment Bill of 2009, and how they were "concerned" about the cuts the Senate had made from the House version of the bill. Below is an excerpt from Rep. Ellison that came toward the middle of the 60 minutes; it caught my attention at the time and I will quote it here without comment, as I'd really like to get some thoughts from all of you out there reading this first.
"Reclaiming my time, you know, the Federal Government has been there for so many of us, even those of us who are under the mad delusion that we did it all ourselves. You know, you may be a big successful businessperson, but you get out of the bed in the morning knowing that if somehow you had a medical problem, 911, you could call them, and the EMS truck -- that's the government -- would come take care of you and take you to the hospital.
If you do manage to get all banged up and clean, the water coming out of the shower, somebody's inspected it to make sure that it wasn't going to poison you.
You get in your car and you get out on the road, that's the government, too, buddy, making sure that you have a decent road to go on.
And then because people aren't driving a gazillion miles an hour driving crazy, there's a cop out there making sure that people obey traffic rules. That's the government as well.
And there is a light that's properly regulating the traffic flow, the government. And then you drive to work and you see your employees, and you know what, they were educated in public school, the government again.
And after all of that help you turn around and said I did it all myself, and I don't want to pay these taxes because they're reaching in my back pocket, wait a minute; we've been helping you every single step of the way. Maybe the invention that you sell was on a government research grant.
So many opportunities are afforded us because we come together, because we are a society that operates for the common good, and yet, we have some people who only want to say that it's all me, I did everything, it's just me, I don't want to pay any taxes, I don't want to help anybody out, I don't care about any poor people. I don't care if a husband had a mental health issue, couldn't maintain his livelihood; she ends up having to turn to a welfare system which really is a caring society. I don't care about them. I don't care about those three kids. I don't care about those homeless people.
That kind of psychology is why we exist to try to tell people that we're better off together than we are apart. We're not trying to stop you from being able to do your own thing, but don't forget about the rest of us as you do your own thing."
#4 - Finally (this is obviously much belated), on Inauguration Day I was prompted by strange comment made by Sam Donaldson involving the fence around the White House grounds and something about "Calvin Coolidge's goat" grazing on the White House lawn to read a bit more about President Coolidge. Suffice to say, I read enough that I became interested enough to want to do deeper research on Coolidge and his administration and would like to devote a post to this topic sometime in the future. I wanted to mention though, since I find it quite fascinating and entertaining, that I also learned that President Coolidge and his wife, Grace, were great lovers of animals and kept quite an array of "pets" both in the White House and before. This included several cats, 10+ dogs, several birds (including a mockingbird and a troupial--a tropical bird from South America), rabbits, a bear, a pair of lions (which they named Tax Reduction and Budget Bureau), a small hippo, a wallaby, a duiker, 13 Pekin ducks, a pair of rock bass (sent to them as a gift intended to be eaten; instead, the Coolidges kept them for a while in their bathtub in the White House), and a raccoon named Rebecca who apparently enjoyed playing in the water in the bathtub with a cake of soap. Apparently, the Coolidges ended up giving some of the animals to the Rock Creek Zoo (now the National Zoo) in hopes they would have a better environment. Anyway, here's a link to a story written by historian David Pietrusza about the Coolidges and their pets that's quite interesting...something you don't hear about in history books.
I Agree With Krugman
Shudder to think.
Yes, I just read a recent op-ed from Krugman - available here. I have to say, for the most part, I agree with him completely in this article. The Obama administration, in concert with the Federal Reserve, continue to "dither" along - avoiding the "bold action" which has been promised.
At this point, whether we like it or not, we must realize that ad hoc injections of taxpayer dollars will not fix the banking system and do not qualify as bold action. Despite Ben Bernanke's claims, we have a system of "zombie" banks. These banks are dead (bankrupt) and are being fed brains (taxpayer dollars) by the Fed and Treasury. And speaking of the Treasury, Tim Geither's claims that the "toxic" assets are undervalued is simply not a plausible explanation. Sure, some of the assets are undervalued, some are overvalued. But, it is nearly impossible to determine the value of these assets with the corporate lies, government guarantees, and lack of clarity which distorts market action.
The only bold actions which will help us at this point are ones which allow the market to cleanse itself. That means significant pain (we're going there anyways) by letting the banks go bankrupt. We need to put a bullet through the head of each zombie.
I'll leave you with Krugman's words:
Yes, I just read a recent op-ed from Krugman - available here. I have to say, for the most part, I agree with him completely in this article. The Obama administration, in concert with the Federal Reserve, continue to "dither" along - avoiding the "bold action" which has been promised.
At this point, whether we like it or not, we must realize that ad hoc injections of taxpayer dollars will not fix the banking system and do not qualify as bold action. Despite Ben Bernanke's claims, we have a system of "zombie" banks. These banks are dead (bankrupt) and are being fed brains (taxpayer dollars) by the Fed and Treasury. And speaking of the Treasury, Tim Geither's claims that the "toxic" assets are undervalued is simply not a plausible explanation. Sure, some of the assets are undervalued, some are overvalued. But, it is nearly impossible to determine the value of these assets with the corporate lies, government guarantees, and lack of clarity which distorts market action.
The only bold actions which will help us at this point are ones which allow the market to cleanse itself. That means significant pain (we're going there anyways) by letting the banks go bankrupt. We need to put a bullet through the head of each zombie.
I'll leave you with Krugman's words:
[O]fficials still aren’t willing to face the facts. They don’t want to face up to the dire state of major financial institutions because it’s very hard to rescue an essentially insolvent bank without, at least temporarily, taking it over. And temporary nationalization is still, apparently, considered unthinkable.Let's kill the zombies.
But this refusal to face the facts means, in practice, an absence of action. And I share the president’s fears: inaction could result in an economy that sputters along, not for months or years, but for a decade or more.
Sunday, March 1, 2009
Loose Ends... Vol. XXXII
Another Sunday night... another round of Loose Ends where I wish I hand more time. I have a lot of other reading to catch up on, so I'm going to try to keep this brief.
I encourage all readers to spend more time on whitehouse.gov - the Obama team does a very good job of keeping the country informed of what is going on in the White House. Sure, the information is a little biased. But, it's still pretty good. A lot came out of the Executive Branch this week:
Troop withdrawal plan for Iraq
First release of the FY2010 budget
Vice President Biden kicked-off the Middle Class Task Force
Treasury owns 36% of Citigroup common stock
Former Washington Governor Gary Locke nominated to be Commerce Secretary
Clearly, there was a lot more going on too. Just visit the official site to stay on top of things. I'm happy to offer my opinion (backed with unbiased facts where applicable) for any item you see... just drop me a line.
*****
On the state front, members of the Indiana State Senate have submitted a resolution to re-assert the Tenth Amendment of the U.S. Constitution. This is a great step forward - I hope it is passed. Indiana is now on the growing list of states who have legislation introduced to assert their sovereignty in some shape or form.
I encourage all readers to spend more time on whitehouse.gov - the Obama team does a very good job of keeping the country informed of what is going on in the White House. Sure, the information is a little biased. But, it's still pretty good. A lot came out of the Executive Branch this week:
Troop withdrawal plan for Iraq
First release of the FY2010 budget
Vice President Biden kicked-off the Middle Class Task Force
Treasury owns 36% of Citigroup common stock
Former Washington Governor Gary Locke nominated to be Commerce Secretary
Clearly, there was a lot more going on too. Just visit the official site to stay on top of things. I'm happy to offer my opinion (backed with unbiased facts where applicable) for any item you see... just drop me a line.
*****
On the state front, members of the Indiana State Senate have submitted a resolution to re-assert the Tenth Amendment of the U.S. Constitution. This is a great step forward - I hope it is passed. Indiana is now on the growing list of states who have legislation introduced to assert their sovereignty in some shape or form.
Rebuttal to Colander, Hass, Juselius, Lux, Follmer, Goldberg, Kirman, and Sloth
I was catching up on the blogs that I follow and came across a link to a research paper on naked capitalism. The paper is entitled "The Financial Crisis and the Systemic Failure of Academic Economics" and is co-authored by all those listed in the long title to this post.
First off, I have to agree with the fact that most all models used in practice to assess risk, hedge portfolios, and understand the economy are dangerous. They are dangerous in the sense that the models are built on assumptions which may hold true most of the time, but fail to be true all of the time. In fact, this has been a contributing factor to some of the systemic risk which has crippled the financial and economic system.
However, I can't agree with a statement like this:
This is a very arrogant statement. I think it is a stretch to refer to economists as scientists - especially macroeconomists. I'll concede that in a strict sense of the definition, economists are scientists. But, the public view of "scientist", especially when it comes to those using numbers, allows for a gross overstatement in the applicability of economic science. Regardless, I cannot agree with any statement which implies that there is some sort of higher moral and ethical standard which individuals should have to apply to their trade. If you don't agree with that statement, then ask yourself who decides what is moral and ethical?
The article also states other research:
Bingo! Banks very well may have recognized the systemic risk that was running through the system due to exotic derivatives such as CDOs (collateralized debt obligations - packaged debt products which shifted risk from lenders to investors). But, as is clearly stated, banks felt they could engage in these risky products because they perceived that the government would insure massive losses. Hmm... looks like perception has become reality. The authors ignore this basic reality in the rest of the paper and instead argue that economic and financial models are to blame for the crisis. It appears to me that if banks and investors did not have an implicit or explicit guarantee against massive risks, they would have behaved differently.
Finally, the authors state the following in their conclusion:
The Austrian School of economics offers a simple explanation of the boom-and-bust cycle which the authors feel is either elusive or not well understood. The Austrian School points directly to the statements I have noted above and briefly mentioned by the authors. Government intervention via interest rate manipulation, control of the money supply, explicit subsidies and implicit guarantees drives malinvestment - including, as the authors state, "overinvestment". It is difficult to infer if this paper is providing a small tip-of-the-hat to the Austrian School or is feigning willful ignorance of their free-market explanations. Given that no Austrian economist is mentioned in the paper, the authors' call for more regulation, and their views against the principles of rational actors, I would have to surmise that the authors simply seek to ignore the Austrian School and implore mainstream economic academics to do the same in a search for an alternate, government-friendly, explanation.
First off, I have to agree with the fact that most all models used in practice to assess risk, hedge portfolios, and understand the economy are dangerous. They are dangerous in the sense that the models are built on assumptions which may hold true most of the time, but fail to be true all of the time. In fact, this has been a contributing factor to some of the systemic risk which has crippled the financial and economic system.
However, I can't agree with a statement like this:
In our view, economists, as with all scientists, have an ethical responsibility to communicate the limitations of their models and the potential misuses of their research. Currently, there is no ethical code for profession economic scientists. There should be one. [emphasis theirs]
This is a very arrogant statement. I think it is a stretch to refer to economists as scientists - especially macroeconomists. I'll concede that in a strict sense of the definition, economists are scientists. But, the public view of "scientist", especially when it comes to those using numbers, allows for a gross overstatement in the applicability of economic science. Regardless, I cannot agree with any statement which implies that there is some sort of higher moral and ethical standard which individuals should have to apply to their trade. If you don't agree with that statement, then ask yourself who decides what is moral and ethical?
The article also states other research:
The most recent literature provides us with examples of blindness against the upcoming storm that seem odd in retrospect. For example, in their analysis of the risk management implications of CDOs, Krahnen (2005) and Krahnen and Wilde (2006) mention the possibility of an increase of 'systemic risk.' But, they conclude that this aspect should not be the concern of the banks engaged in the CDO market, because it is the governments' responsibility to provide costless insurance against a system-wide crash.
Bingo! Banks very well may have recognized the systemic risk that was running through the system due to exotic derivatives such as CDOs (collateralized debt obligations - packaged debt products which shifted risk from lenders to investors). But, as is clearly stated, banks felt they could engage in these risky products because they perceived that the government would insure massive losses. Hmm... looks like perception has become reality. The authors ignore this basic reality in the rest of the paper and instead argue that economic and financial models are to blame for the crisis. It appears to me that if banks and investors did not have an implicit or explicit guarantee against massive risks, they would have behaved differently.
Finally, the authors state the following in their conclusion:
The current crisis might be characterized as an example of the final stage of a well-known boom-and-bust pattern that has been repeated so many time in the course of economic history... Research on the origins of instabilities, overinvestment and subsequent slumps has been considered as an exotic side track from the academic research agenda... because it was incompatible with the premise of the rational representative agent.
The Austrian School of economics offers a simple explanation of the boom-and-bust cycle which the authors feel is either elusive or not well understood. The Austrian School points directly to the statements I have noted above and briefly mentioned by the authors. Government intervention via interest rate manipulation, control of the money supply, explicit subsidies and implicit guarantees drives malinvestment - including, as the authors state, "overinvestment". It is difficult to infer if this paper is providing a small tip-of-the-hat to the Austrian School or is feigning willful ignorance of their free-market explanations. Given that no Austrian economist is mentioned in the paper, the authors' call for more regulation, and their views against the principles of rational actors, I would have to surmise that the authors simply seek to ignore the Austrian School and implore mainstream economic academics to do the same in a search for an alternate, government-friendly, explanation.
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