What's wrong with the stimulus

So, we've been talking about fiscal policy and wall street bailouts, now let's talk about the Democratic "stimulus" plan.

I'm against it.

Taxcuts
Look, I like the taxcuts for lower income people. Especially when the Bush tax-cuts for the upper income people will expire soon, great i think, balances revenue a bit. The problem with tax cuts is two-fold. The last two tax cuts and rebates that Bush pushed for, went to paying down debt, not stimulating the economy. I actually encourage that. This does put more money in the pocket of the American consumer, but 1. they can't spend it and 2. even if they did, it would only temporarily help the economy.

Most people are forgetting is that consumer debt (non-mortgage) is about 2.5 trillion dollars. For the next two decades we are going to whittle this down. Even if Americans get a 10% pay raise, a lot of that money will go to the Wall Street greed mongers to pay back what we borrowed to buy HDTV's, computers, clothes and other things for the last 10 years. The levels of consumption that we have had for the last 10 years, which was the artificial "growth" of the economy was based on consumers taking on more and more debt. It was not real growth. Present and recent historical levels of consumption are financially unsustainable.

The other sink-hole of American wealth, if lining the pockets of wall-street fat cats and credit-lending institutions wasn't enough, is the national trade deficit. Thanks to the promotion of free-trade and outsourcing both mid-high skill manufacturing and low-skill call center jobs the economy exported 4.5 million jobs to Mexico, China, India, Taiwan and all the countries that now make products that used to be made in the US. That probably doesn't include the jobs that would have been created like the eateries that pop up around places of employment and suppliers for those goods.

So the reason the tax cuts won't stimulate the economy is that smart consumers will pay down debt (like the banks did with bailout money) and if they spend that money, a lot of that money will be exported to other countries (Saudi Arabia, China, etc).

Social Policy
There's a good bit of money going into the coffers of state and local governments that doesn't create jobs, it just stops the hemorrhaging of jobs that would be due to layoffs from decreased government revenue. I don't agree that all this 'stimulus' money should go to pay for healthcare, unemployment benefits and the like. I think it much wiser to fund intelligent infrastructure projects that will be coming soon to a road or utility near you. Instead of padding unemployment, the government should fund training programs specifically for the upcoming greening of America. This can range from short-term weatherization to long-term programs to build the capacities to manufacture high-speed trains domestically. We're decades behind Europe and Japan in this respect, and instead of paying people to look for work, pay them to have the skills necessary for the medium-term and long-term infrastructure projects. That's not spending, that's investment.

Infrastructure
Not big enough. If it was up to me, we'd have tax cuts and infrastructure only. I count training programs for skills needed to build infrastructure as part of infrastructure projects. The infrastructure I'd be looking at building is mass transit, high-speed rail, smart grid electricity, large-scale DC power lines from middle-american wind-farms (vastly different from smart-grid technology) and the like. All of the infrastructure projects would be green projects unless it is for road, bridge, water, swere repair. Building new roads to handle capacity would be replaced by installing mass transit systems. Paying billions of dollars so that people can watch TV (converter boxes)? Really? I mean really?

So I'm against the stimulus plan. Just becasue supposedly we have to 'do something' does not mean that we have to do everything. Obama talked about prioritizing. It seems that his priorities is to create something that's palatable to the Democratic base that got him elected. But i didn't vote for that. I voted for someone who wasn't afraid to make the 'hard decisions'. Instead of spending money on Bush's war, you're now spending it on Obama's society. If he was bold, two-thirds of the bill would be in infrastructure spending.

I think he thinks we'll get to that point sometime. I'm pretty sure that he thinks the move to spend on priorities is a gradual process.

It isn't.

Go green, go now.

One giant Ponzi Scheme

For the last couple months i've been thinking about the spiraling downfall of the American economy as based on the loosening of credit standards. In a conversation with my father, he reminded me that historically, banks only made business and corporate loans. For the majority of the American experience, if you wanted to buy a house, you talked to the person that owned the land and made some kind of deal that you could build a house on his land and make payments to buy that parcel of land. If the house already existed, we would in modern terms call this a rent-to-own agreement.

But somehow, someone got the idea that it would be a good thing if people owned their own homes, and Uncle Sam got in the act of creating Freddie Mac and Fannie Mae to help 'average' Americans get enough credit to purchase their own homes. Sometime around the eighties, two things happened that i think laid down the infrastructure of our current downfall. First, lending institutions started lending to a lot more homeowners. Second, the widespread application of the 401(k).

The growth of the 401(k) meant that there were tens of thousands of more new investors in the stock market. This steady influx of money for the next two or three decades fueled the average increase of the price of a stock. The growth of access to consumer credit for home ownership enabled people to purchase houses that were formerly unattainable, not just too expensive. As more and more people got home loans, prices for those homes steadily rose [above historical norms - but that's speculation on my part].

So what's happening, is that people are investing their money and 401(k) are putting money into an inflated product simply because the market price is higher. The same thing for home ownership. But with homeownership its worse.

With home ownership, even though historically prices have been rising (for the reason i mentioned above plus inflation), there is a modicum of risk that you'll owe more than you're worth. This isn't a problem with stocks because you buy stocks outright. Back to homeownership . . .

Now, if you default on your home loan, both you are out of a home, and the bank is out of both its money and its profits. So by giving more people the ability to borrow from banks, this puts them at greater and greater risk the more loans they have. Hence our bubble.

So what was happening in the mortgage industry is that banks would make unsubstantiated loans (see this NYT article). But they weren't left holding the bag because they then sold these loans to investors (whose company smaller investors invested in).

Now, the structure of a Ponzi scheme is that i tell one guy to give me ten dollars and i'll give him twenty next week. then i get two more people to give me ten, and i pay the first guy off. That first guy then re-invests, and gets his friends to invest too. Then i pay off the second group with the new money and the re-investment. Now, what happens is that I then have more and more people coming in to get their guaranteed returns. And the cycle perpetuates until i get less people coming to pay the people already in.

So, we hear of this with the Madoff scandal, which rocked to the tune of 50Billion large (well, small these days). The reason Madoff made off with so much money is that he didn't do the doubling in a week. He paid relatively stead premiums let's say once a month. So if you get a guaranteed return of 12% a year despite what the market does, and over the course of ten years this is guaranteed money, of course you'll tell your friends and associates. That was the wonderment of his Ponzi scheme, the slow but steady returns.

Some folk, including myself, realize or say that the Social Security system has the same structure, and that's why there's what we call an 'unfunded mandate'. But more or less on that later.

Now, though this scheme was working flawlessly for Madoff for his twenty or whatever years in business. I'm saying that that's child's play. I'm saying that the bailout is really a response to a larger uninentional Ponzi scheme. This larger unintentional Ponzi scheme was a direct result of the loosening of available credit using automated software. This automated software that allowed banks to process hundreds of times more loans than before, making 'competition' against the next guy not finding the good borrowers but lending to more and more people. So the housing bubble was perpetrated on selling the higher priced house to the next schlep that comes along. The sorry thing was that the next schlep didn't have to certify that they made enough money to pay the bills, but only that they had half-way decent credit?!

Another thing that accelerated the increase in housing prices was that the couple of schleps in the middle borrowed against and pulled equity out of their houses to pay down unsecured credit card debt (who the hell would trade unsecured credit for secured credit? just stop paying the suckers). So these consumer/homeowners were robbing Peter to Pay paul, and making Timothy foot the bill.

So the confluence of the increase in available credit, automated loan-processing software, laxer lending standards, unsecured credit

The Housing collapse is evidence of the greatest Ponzi scheme ever perpetrated.

we elected the auto bailout

Every once in a while a couple things swirl into a theme. I was listening to NPR earlier today and they were interviewing people who went overwhelmingly for McCain, and are still weary, not hopeful, of an Obama presidency. That was one. Two, i read about the Madoff scandal, I only got interested due to another story on NPR, but that is besides the point, so that's not actually point #2.

The real point #2 is i read on Slate, my favorite e-rag (bad pun on electronic rag/magazine . . . no google hits) a nifty article about the foreign car companies doing wonderful business in the American South. They say it was partly because of the fact that these are 'right-to-work' states. Right-to-work states are those that make illegal the 'forced' collective bargaining rules of some unions that make deals with employers that say that all employees have to at some time sign-up for the union. [the wikipedia article has arguments for and against].

But what got me was when i saw a graphic of the right-to-work states:


as compared to the outcome of the 2008 election:


I found it interesting that the vast majority of right-to-work states went for McCain and the union-friendly states went democratic. This just sparked some thinking along the lines that there's a fundamental schism in American politics, and this shows it. It is the economy stupid. But people vote their wallets, not what's actually in them, but they vote according to how they can and are able to make money.

I still find this hard to swallow, on account of reading the rise of the corporate class across America in the book Who Rules America by William Domhoff and how there is a union vs corporate 'class war' going on and how the white shirts and bean counters got the upper hand. The comparison between these two maps doesn't sit well with the white vs blue collar warfare, as overwhelmingly i don't think of the southern and mid-western states as anything close to wall-street business owner types.

ah well, such are the contradictions and nuances of life. I had the thought it would be nice to have some deep insight that solved this problem, but i've got better things to do than heal the American schism, i just put a guy in office to handle that.

no overtime for you

Hey, i like the idea of spreading the wealth around. In the upcoming weeks, there will be tons of discussions about how to bail this economy out. It will center heavily on rebuilding the physical infrastructure of the company, and promoting green jobs. I have something to add to this to make sure that everything is cool:

1. that no one person can recieve from a company more than 30 times the amount of the lowest paid and third-tier subcontractor. That means that if the lowest paid person in the company (janitor or secretary) makes $10 an hour, no other employee can make in total compensation more than $300 an hour.

Now, when people get government contracts, they usually subcontract out a lot of the work to other companies. What we don't want is shell corporations being created so that the second-tier suppliers do the real work, the requirement for second tier suppliers (including lawyers and accountants) makes sure that the money isn't sitting at the top of the foodchain.

2. that there are percentage limits on overtime. That is to say that no one person can work more than 50 hours per week. Why this? because i'm afraid that you'll have the skills and work hogged by a, though competent, few people. by limiting the overtime, what companies will have to do is to hire more people.

oh how we have forgotten

In the past few days, i really get upset for periods of time thinking about how short a memory the media has. It seems that during the bailout blame-game, not many people stop to think about who is the originating culprit of this mess.

I mean sure, wall street messed up. They bought the securities, the seemingly objective rating firms gave the rubber stamp to these securities and then AIG insured them, based on the ratings firms stamp of approval.

So, the blame partly goes on the ratings firms such as Standard & Poors, and Moody's and so forth. They were supposed to be the watchdogs. However, like an article i recently read put it, the watchdogs stopped watching. This led to the quick unraveling of wall street's cohesion, both within individual firms, and across the board.

But, the question begs: who did they buy these securities from? From Countrywide. Haven't heard much about them lately? Because they went belly-up almost first! So, countrywide was pamphletting California with mortgages structured not in the best interest of either the lender nor the borrower. They made their money on the transaction fees! So, their profits came not from the integrity of the deal, but from the transaction of the deal.

For instance, VISA makes money everytime you use your Visa card. So, of course they're going to advocate the use of your credit card, whether you have good credit or not! The same with Countrywide's strategy to make its dough on the transaction, and then get the mortgage, like a hot potato, out of its hands as quickly as possible.

So, the primary blame lies with Countrywide. Secondarily, the blame lies with the ratings bodies such as Standard & Poor's and Moody's who gave their rubber stamp of approval to those shoddy investments.

imagine if the crash-test rating system was flawed and they started giving five-stars to anyone for attempting safety, not for actually creating safe vehicles. Pretty soon the country wouldn't trust them right? There would be a call to overhaul the system. The problem i see is that not many people are asking for oversight for the ratings bureaus, the bureaus that attempt to assure the trust, honesty and integrity of the financial realm. That's who we have to monitor.

Monitor the monitors, then society will start to build trust again.

Waxman, my new hero

This just in . . . Lehman executives made off with about $10 billion in bonuses as they cried wolf to the feds about how they were going down the tubes. I repeat, as Lehman Brothers asked the Fed to step in and help, they at the same time gave their top executives about $10 billion in golden parachutes, bonuses and other kinds of compensation.

Livid is such a bland word to describe what i feel. Criminal is not adequate to describe the debased morality of those executives.

Now, i'm livid that relationally the kids on my block who get 3-5 years for assault and battery (well, it happens) get way less time than white-collar criminals who get nothing but a slap on the wrist for mis-managing BILLIONS of dollars of other people's money.

Why isn't this a crime again? Why won't they be thrown in Jail? I'm thinking RICO act or something, collusion, market manipulation etc. And when they do go to jail, they should go to county jails with hardened violent criminals, not the 'country club' federal jails that we hear so little about.

I want the head of lehman to be next to a guy named bubba who has tatoos, not a Martha Stewart jail.

Why we're not in a (economic) depression already

I've been wondering that with the largest five investment banks going under, why isn't the economy in a full tailspin already? I mean we've seen this coming for two years, and though hopefully half of the crisis is in our rearview mirror, i've been wondering why we haven't gone into a recession by now, or even a depression.

I mean, some of the major indicators are harrowing: the rate of new housing and price of new housing is dropping (but mainly driven down in over-inflated markets like cali and florida, my little neighborhood of West Philadelphia is treading water with a little bump here and there).

What's saved us? Toyota and Wal-Mart. Well, not exactly that company, but the things that make them great: lean thinking. To get what's going on, you have to understand the difference between the construction of supply chains now versus twenty years ago, and much of the change can be attributed to businesses inhaling the notion of lean thinking or JIT (just-in-time) production that was imported from Japan.

So the scenario twenty years ago was that if i was in manufacturing, and i had a couple clients, i would make large batches of products so that i had 'inventory'. Now, i had to make enough inventory so that stuff wouldn't be on back-order for 3 months, so i also had to buy space for this inventory. Now, when my main buyer went out of business, i lost thousands or millions because i had no place to sell my goods.

This may seem bad for A business, but it was even worse for the supply chain. How? Well, i then reduce my orders from my suppliers who feel the same reverberation. But, since i supplied the company that just closed its doors, i also supplied them along with my competitors and other companies who created complementary products. Now, since i got a reduction in orders, also my competitors and complementors did, so OUR supplier is now out not just the business of one business (mine) but multiple businesses (my competition and complementers).

This is a process called amplification. So a disturbance closer to the consumer end of the supply chain, amplifies its consequences down the supply chain. And vice versa . . . when the midwest suffers a drought, all the products relying on corn suffer from higher prices, and lower profit margins.

So what has changed? Wal-mart. Wal-mart got on the IT train real early, and all-in. What they did was set up a system so that their suppliers had real-time access to the current and historical rate of sales of their products. What that meant was that companies instead of creating abstract and guess-based forecasts, they could accurately predict how much an item would sell, and in what seasons, and in what quanitties. So, they no longer had to go through miniature boom-bust cycles for their inventory, they could create a relatively consistent stream of production.

If they then transmit this information to their suppliers, then their suppliers have more realistic information and goals for production. So the amplification factor is minimized or at least reduced drastically due to better communication. Two days ago i saw a graph from another blogger that charted the price of fish in coastal African markets and the volatile fluctuations, until cells phones came in. Now, fishers can call ahead to see the price of fish and can choose to go where the best price is instead of waiting to get all the way to the market and gambling on price. In the graph, the variation was about a third of what it was before!

I remember back in the early-mid nineties when i watched NBR (nightly business report) over my father's shoulder how they would report fluctuations in manufacturing. I would assume that the fluctuations aren't as volatile as before most of the economy started with this IT thing. Now, the situation is far from over, many manufacturing and a few other sectors of the economy are far from investing and/or utilizing their IT departments in such a way as to communicate back through their supply chain, but it is happening, and this fact has enabled the contraction in credit to not adversely affect the rest of the economy. Why? Because you don't need a loan for guaranteed money, you need a loan for speculative money.

Since businesses are relying less on borrowed money for their core production, what's suffering is the creation of new business, not the sustaining of old business. Well, that's my half-pence of analysis anyway

Better idea than i had

I was talking to a student in one of my courses and he proposed a novel idea. Instead of giving these corporations all this bailout money ($700 Billion), which would leave the average American still in debt, the government should give each taxpayer making less than $75,000 per year a check for $40,000. Now, the condition is that these taxpayers could only apply this to their debts (so no shopping at Home Depot)!

So, if this is done, instead of only the risky and swindling banks getting bailed out, we'll have millions of Americans in a better financial position with reduced and/or no debt. This would increase our basic net worth and how much money we have available to buy other stuff, hence keep the economy going! And the vulturous credit companies (mortgages and cards) would still sort-of be rescued because they'd get all this money on their balance sheet!

So, instead of bailing out just the companies, we'd be bailing out John Q. Public!

He also mentioned that in a bargain for this, the Americans trade this for higher taxes for the next 5 years. I think that's a bargain, don't you?

Send this to five people if you agree.

anotherdirtysoapbox.blogspot.com

i need a bailout too

Yo, i need a bailout. My company lost 3.6 billion and all i'm getting is a 11.6 million compensation package. . . of course i'm lying, and so are they!

Really though? I've been reeling at this crisis, and there's a lot i don't get about it. We have two parallel crises on our hands. the first crisis is the home mortgage crisis, and the second is the Wall Street business credit crisis.

The supposed bailout that is being proposed on Wall Street bails out the Wall Street behemoths who bought and re-packaged bad loans to each other, and lent money based on the profits from their swindling ways. But, there doesn't seem to be a bailout being proposed for the mortgagees of the swindling sub-prime loans that were taken to be fleeced and are now left with loans they can't afford.

Now, there seems to be a real problem in the financial sector, that makes everyone nervous. But that's just the thing . . . it sounds only like its in the financial sector. I don't see how the contraction in credit will churn the economy to a grinding halt. But then again, i'm not in finance, but i do know a little bit. I just think the world economy needs a little sobering up on building a solid and stable economy versus the rampant unsubstantial 'growth' and profits that corporate business has had, while the rest of us struggle to pay our bills.

I know that it seems very short-sighted of me to want to tell those investment bankers to go jump out of a building (see crash of 1929) but i mean, they swindle joe homebuyer and want jane taxpayer to bail them out! They robbed peter, gambled and lost, and want paul to pay for it. How ludicrous is that!?