Loose Ends... Vol. XII

It was a wild ride across the world in the equity markets. It was hard to miss the news of the crash in the U.S. this week, but we were not alone. The chart below summarizes the week that was for the major stock indices of countries around the world. (Compiled using Yahoo! Finance.)

This results in severe losses for those who participate in the markets. This includes your 401(k), pension plans, and the small investments of people across the country (and world). But, it also includes major institutional investors, investment bankers and speculators. It really doesn't matter who are the biggest losers. It signals significant problems with the fundamentals of economies around the world.

Why would we see such a fall? Let's go back to the basics for a second. Owning a stock is owning a share of the company. The price of the stock is essentially an attempt at pricing the value of the company. The price of the stock multiplied by the number of shares outstanding places a price or value on the entire company (this is called the market capitalization). So, a decreasing stock price indicates a decrease in the overall value of the company. This can be caused by numerous factors. Two important factors are determined by the two key financial statements of a company: the balance sheet and the income statement (or P&L). The balance sheet looks at a company's assets and liabilities (debts). The income statement summarizes the profits for a company. If a company is overwhelmed with debt (as many are experiencing) or is expected to have a reduction in profits (perhaps due to a recession), the valuation should decrease.

This is clearly an oversimplification of the way the markets work, and, as such, an oversimplification of what happened last week. But, the increased risk of debt and the fear of an overall economic slowdown are the two basic reasons (in my opinion) that we had the crash.

As a result, the world's economic leaders met in Washington to work on solutions to the problems. The joint press release from the G7 leaders with their action plan can be read here. Henry Paulson's statement following the meeting can be found here.

This week I hope to get around to the next installment on the Fannie and Freddie rescue. I've also been continuing my reading of Ludwig von Mises. Our laptop is back - it seems to be working - but we are going to install a new operating system. So, once that's taken care of, I hope to increase the frequency of new posts. Until then...

"King Henry" indeed

It's hard for me to describe exactly what it is I've felt in response to the events of the past few weeks, I suppose mostly because it's been so many things--disgust, exasperation, disappointment, anger. I'd like to hope that I'm not anywhere close to the only one who shares these sentiments and I would strongly encourage ANYONE who is also outraged to not "suffer in silence." DO SOMETHING!! ANYTHING!! (well, "anything" within reason...I'd not like to be accused of encouraging lawlessness) Nothing will change until enough of the people realize that they can channel their outrage, frustration, or even apathy, into something more productive. Ok, enough sermonizing...

In my own outrage over the events of the past few weeks, I've found it rather difficult to form anything relatively coherent enough to post so I've been rather silent. One thing that that has struck me in particular is the emergence of "King Henry" Paulson, as Rep. Jim McDermott (D-WA) has cleverly named him. I readily admit that I've never liked Paulson since the first time I heard him speak, at a Congressional hearing I happened to catch on C-SPAN about a year or so ago. I believe it was a hearing before the House about Bush's budget proposal. Prior to that, I'd never really paid much attention to him--admittedly, I didn't pay much attention to politics in general prior to that. As I watched, I remember thinking that he seemed very "slippery" and was doing quite well at not answering anything he was asked; this has continued into every appearance I've seen him in since. I recently watched a video on YouTube of Paulson, which is from that same hearing (although I don't recall seeing it "live") that demonstrates this quite well. Paulson is also prone to stuttering when answering questions, which doesn't do much for his credibility, in my opinion. (As far as I know, Paulson doesn't have an actual medical "stuttering" problem, but I apologize if I'm mistaken.) I'm also just naturally distrustful of anyone who has served as a CEO for an investment bank, insurance company, etc. and receives a multi-million dollar salary for such a position, unless they are the founder/owner.

Apart from the fact that I have serious issues with the fairly established trend of appointing former CEO's and the like to the position of Secretary of the Treasury (I also feel like there's something not quite right about the appointment of all these cabinet positions where the people have absolutely no say, but I haven't really formed much of an argument about this particular issue yet), the recent bill that our Congress passed does indeed seem to give this un-elected official nearly unlimited, unchecked "king-like" powers. When I started to read the "bailout" bill, I was dismayed after the first few pages at how much everything in it revolved around the "Secretary." In fact, in the final passed version of the bill, in only Section 1 (the section that really lays out the TARP) the word "Secretary" (referring to the Secretary of the Treasury only; it appears in other contexts but I haven't counted those) 159 times. Let me say that again--159 TIMES!!! How is this in the least bit appropriate? This bill isn't about protecting taxpayers or helping out "Main Street" (if I hear one more politician prattle on about how they're concerned about "Main Street," I'm going to punch someone)...it's really about Secretary Paulson.

In some vague way, I'm sure most average people can understand that such an unprecedented "gift" of powers to one individual is probably not a good thing. Consider some of the language in the bill--"on such terms and conditions as are determined by the Secretary" and "the Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation, the following." Under the "following" are a number of authorities given to the Secretary that are defined in a manner so vague as to essentially allow him to do anything he chooses. Anyone can recognize that this is simply begging to be abused.

What I find even scarier is the huge, glaring conflict of interest here--as former CEO of Goldman Sachs, I believe it's simply not possible for Paulson to NOT have a conflict of interest in regards to the position he's been put into. The first two "General Principles" listed in Part A of the "Standards of Ethical Conduct for Employees of the Executive Branch" are as follows:

(1) Public service is a public trust, requiring employees to place loyalty to the Constitution, the laws and ethical principles above private gain.
AND
(2) Employees shall not hold financial interests that conflict with the conscientious performance of duty.

There are many more, but I think Paulson "fails the test" so-to-speak on both of these counts; it's just not possible for him to put aside his previous work experience and connections at Goldman Sachs so they don't "conflict with the conscientious performance of duty." I'm far from an expert at such things but don't many CEOs, executives, etc. get a large part of their compensation not in salary but in things like plain old company stock and restricted stock units (RSUs)? While I'm sure that Paulson sold all his "stocks" of Goldman when he accepted the appointment as Secretary, if he did hold any RSUs (I'm not sure if he did/does) he may very well still have them if the conditions for their "pay-out" haven't yet been met. This definitely wouldn't jive with the ethics conditions listed above. Of course, I could be way off base on how this works (RSUs, etc.) and, if so, would welcome someone more versed to correct me.

What troubles me more is not the usual "Paulson wants to help his cronies," etc. but that it doesn't seem to bother anyone that either Paulson will continue on as Secretary of the Treasury into the next Presidency (it's not an automatic that he'll be out, as some seem to suggest) with the same unrestricted authorities OR he'll resign. If he does resign, does it seem likely that he'll simply go away and retire? I certainly don't think so...no, he'll be looking for a job and what sort of job is he likely to get? Well, another as CEO of a financial institution certainly seems like a good candidate. This surely is the basis for another grave conflict of interest, as Paulson is sure to be careful that he helps out those companies who he might be working for, and getting multi-million dollar salaries from, after he is no longer Secretary. There's no way he wouldn't be thinking about that on some level...he's not that stupid.

Now, I'm not saying that I think Paulson is evil or is even a bad guy but I think he should have known better than to get himself into this position. When there is so much potential for a conflict of interest, no matter how much you'd like to "pretend" that you've washed your hands of your previous committments, people simply don't work that way...the brain doesn't work that way. This is most dangerous, I feel, when it manifests itself in high-level, appointed positions such as Paulson's...and if Paulson didn't know better, there should have been someone there who did to stop him.

I feel that I've rambled quite a bit now and fear that I've written something terribly incoherent, so I'll stop now but I'll leave you with a photo that struck me quite a bit when I saw it yesterday...creepy.

Case for Wiki

As you may have noticed, I like to provide a lot of links in my posts. More often than not, I link to Wikipedia pages. The reason I like to use links is twofold. First, I want to provide references for my facts where applicable. Second, I like to provide you, the reader, with additional opportunities for education. Remember, one of our primary missions here is to educate. Once educated, you will be prepared to stop taking the soma!

But, why Wikipedia? And, what does that have to do anything in these crazy times?

The concept of the encyclopedia has been around for a long, long time. I was tempted to do more thorough research and tell you all about it. But, instead, you can read the Wikipedia link here. The basic evolution of the encyclopedia makes sense. Early works were compiled and edited by primarily one person. This led to a system of more contributors with a system of bureaucracy for the purposes of editing, quality control, etc. This became more and more advanced until the forerunners of today's Wikipedia came along. This evolution led to a system of authorship and editing from many authors with little or no bureaucratic oversight.

Encyclopedia Britannica is arguably the best in class from the more traditional standpoint. But, Wikipedia blows it away in terms of online use. In fact, my quick research using Alexa leads me to the conclusion that Wikipedia is used close to ten times more frequently than all other online encyclopedias combined. Wikipedia has had an average reach (percentage of online users who visit the site) of over 8.5% over the last three months. Britannica averages about 0.5% for reach. Microsoft's Encarta makes up approximately 1% of all visits to msn.com, which gives it (at best) an average reach of 0.2% by my estimates. Additionally, the average visitor to Wikipedia views 4.8 pages which is far more than the 1.3 pages per visit for Britannica.

However, there are still some people out there who like the traditional encyclopedia better. They don't trust Wikipedia because of its lack of oversight and regulation. The prefer the comfort of knowing that Britannica and other encyclopedias have expert contributors and a system of review and editing to ensure the articles are the best that they can be.

For me, I choose Wikipedia. Hundreds of thousands of people contribute to Wikipedia. It is self-policed, self-managed, and self-regulated. There is far more content available on Wikipedia than any other encyclopedia in terms of the number of articles, and the average article has a similar number of words as most other competitors. I have also found the articles to be more balanced and rich in references and links.

If you agree with me on these points, then I'd like you to consider the following... don't you wish your system of government and society were more like Wikipedia? Wikipedia is proof that the free market works. It is an example where the contributions of the many perform a better service than the authority of the few. There are a few bad apples to be sure. However, one bad apple at the top of the Britannica bureaucracy could bias and ruin the entire volume of work. The next time your told that the free market can't work or that the people need the government to step in and solve the problem, think about Wikipedia. Did I mention that you don't get paid to contribute to Wikipedia?

Of course, if you don't agree with me on my preference for Wikipedia, then we should argue some more!

A quagmire of green (greed?)

The doo-doo seems to have hit the fan, and it's splattering everywhere.

It's so hard to make sense of the chaos of current events without turning into a pundit. Nevertheless, it's also hard to turn a blind eye to the calamity in the U.S. economy right now; especially given the degree to which H.R. 1424 seems to have done for Paulson what the Iraq Resolution did for Bush (well, Cheney, probably). And we all know how well that went, don't we?

I'm generally a fan of government intervention when it's apparent that problems won't fix themselves; that's, after all, why we agree to pay taxes. However, I'm distraught at what appears to be the greatest deliberate pillage of average U.S. citizens in a very long time (if not ever).

In defense of fat cats, reckless debt habits on everyone's part (personal and industrial) have gotten us here, for certain. I'd also wager that equally reckless ignorance and apathy by common folks is another major factor. After all, if most people had been educated enough to look behind the curtain of fear, reactionism, and propaganda during the better part of the last decade, there would have been no mandate to approve our ridiculous excursion into Iraq – undoubtedly one of the stupidest maneuvers this country has ever performed, and no doubt something that will affect our economic and world standing for at least an entire generation.

By the way, I don't think that's hyperbole. These things cause ripples, and it's been frustrating to no end for the last seven years to bear witness to.

But chief on my list of concerns at the moment is how the trouble with the U.S. economy will now affect the global markets. It already is. Part of me says this is a good thing, and that it will weed out the thieves and scumbags from the equation and cause people to be much smarter and judicious investors.

Still, this will take time. A long time. And we're not out of the woods yet. Hold on to your bootstraps...if you've got any boots left.

Loose Ends... Vol. XI

Well, so much for the courage that our House of Representatives displayed on Monday. The "rescue plan" sailed through the Senate on Wednesday as an amendment to a bill which had already passed the House. It can back to the House, complete with extra pork, for debate and concurrence on Friday. It passed.

This week has made me think more and more about what I can or should do about this. I believe that our country is on a serious collision course for peril. I hope it is only economic peril, but I fear greater consequences. It is a long time in the making... and I plan on researching, analyzing and informing you as my discovery expands. In the meantime, I'll keep posting and keep reading. I'm not sure what else to do at this point.

Speaking of reading... this week I read The Law by Frédéric Bastiat. In a word it is brilliant. Bastiat lived in France in the first half of the nineteenth century. His political and economic philosophy serves as a fundamental backbone of libertarian ideals. It is a short read, and I recommend it highly to everyone (it is available online here).

Bastiat elegantly argues that everyone is entitled to life, liberty and property. Everyone is entitled to protect these from the plunder of others. I will spare you any more details because you should read it yourself!

This essay is of particular relevance this week as we see the government steal more money from taxpayers (no, this is not a patriotic act) to invest in risky financial derivatives in the hopes of "protecting Main Street"... how arrogant! The government got us into this mess and they will not get us out of this mess - it will get worse.

My next reading adventure (and this is a long one) is The Theory of Money and Credit by Ludwig von Mises. I feel I need to get more acquainted with economic theory, and I believe that my instincts align most closely with those of the Austrian School.

I leave you tonight with a quote from another work by Bastiat entitled Government:

"Government is the great fiction through which everybody endeavors to live at the expense of everybody else."

Who's throwing away their vote?

I have not yet posted here and probably won't often, but I'd like to get this out there.

I live in Chicago and pretty much all my social circles are filled with democrats who support Obama. Some are die hard supporters who have worked on campaigns others are less enthusiastic. When political discussions arise and I mention that I will not be voting for Obama, most people are initially appalled. When I tell them that I will also not be voting for McCain they are less appalled. Then comes the ubiquitous response that a vote against the two party system is a 'thrown away vote.' Most people express their mutual disgust with the political machine and that they, like me, wish it wasn't like that. Many people feel this is too important of an election to take a stand at this time. I'd like to ask the question "Do you think Obama has a chance of losing the state of Illinois in the upcoming election?" Here is an article discussing how Obama is winning big in polls in Illinois, which I'm sure everyone would find as no surprise. So I am suggesting that this IS the year for people who wish they could vote independent and not feel like they are going to 'throw away their vote' to do so. I would hope everyone would do this, but particularly people who live in states that are not considered to be swing states. Make a statement and vote for a third party. I would argue that voting for the two party system in a state that is considered a 'lock' is more likely 'throwing away your vote' than if you vote for a third party.

Tonight's Letter to Lugar

Senator Lugar,

I write to you alone tonight because I expected more from you. I must say I am deeply saddened and disappointed with your vote this evening. I empathize with your fears that we face economic hardship. I recognize that Congress feels it must act. It is painful to see the government abdicate its constitutional duties yet again in the name of the greater good. Our founding fathers were wise to place limits on government. As a nation, we have increasingly neglected the wisdom and prudence of great minds such as Jefferson, Madison, Franklin and Henry. I feel like I have now officially lost my liberty as the government will truly do anything they deem necessary. Once this sentiment is entrenched, as I had already feared it had, the only thing I can look forward to is a new government which respects all of its citizens - not just the ones it feels need special attention in a given moment. America is still strong. The people are still strong. We can endure hardship. Search your feelings... I hope you realize that you have made the impending economic failure that much worse tonight.

Respectfully,
Matt Wittlief