it's been a long time

I haven't written in a LOOONG time.

I stopped writing because, frankly, nobody was listening. That sucks, but reality does that sometime. Now when i first got wind of a web page builder called "geocities" oh so long ago, I used to read thesis statements of grad students on biology, the kaballah and all kinds of things. I pined for a world (yes, i said 'pined') where people could write their thoughts down and communicate with each other.

I imagined little worlds.

Well. That utopia has become a shark tank. Now it isn't about sharing thoughts and ideas, its about traffic, monetization and clicks. The other problem is that there just isn't enough time in the day to read all the cool things that I want to.

meh.

[the title of this blog is a reference both to Timbaland on an Aliyah song as well as a Rakim song too]

fair and balance in tax reporting

a friend of mine sent me this link to consider: http://finance.yahoo.com/banking-budgeting/article/106769/Do-the-Rich-Really-Deserve-Such-a-Bad-Rap

It actually gave me an opportunity to do a little research on what i think the 'real deal' is. What I mean by that is uncovering just exactly what the super rich people make in relation to how much they pay taxes, so after a little "research" i wrote back this message:

good article, but:

"Approximately one fifth, 20.58%, of all income was earned by the top 2.67%, those households earning more than $200,000 a year." from http://en.wikipedia.org/wiki/Household_income_in_the_United_States

If someone complains that 2.67% of the country pays 20% (or whatever) of the taxes and that's not fair, then they're not giving you all the relevant information to assess the facts. It is said that "there are three types of lies: lies, damn lies and statistics." To be fair and balanced in that statement/complaint, that those 2.67% also make 20% of the money.

The same page also says:

"Roughly one third, 32.5%, of all income in the US was earned by those households with an income over $150,000, approximately the top five percent."

and "The bottom 6.37%, however only earned 0.27% of all income."

I think that's a little more balanced.

***I cut some of the rest of the message out because it was the start of another argument/line of thinking. I didn't even mean to send it to him. Hope he didn't get confused from it.***


for instance, those 400 people they paid 1.77% of all taxes for the year, but i would also like to know what percentage of total income they earned.

Those 400 people made 105 billion total.

It's one thing if you pay 1.77% of taxes, but if you make 5% of the money, then that doesn't "add up"

Keynes on Stable Interest Rates

A good buddy of mine was recently critiquing my admonition that the Fed/Treasury or whatever should post its long-term interest rates. My position is that the volatility that the Fed creates to put the pedal and brakes on the economy (to fight inflation and deflation) actually create some of the volatility in the market (as in how the Real Estate boom was created due to the low interest rates the Fed used to battle the after-effects of the dot-com bubble.

I read an Austrian Economics blog that put up a post on this very subject. The funny thing about it is that it doesn't quote some quack of an economist to bolster its point. They quote Keynes himself, who many people attribute the policy of large government spending:

“A low enough long-term rate of interest cannot be achieved if we allow it to be believed that better terms will be obtainable from time to time by those who keep their resources liquid. The long-term rate of interest must be kept continuously as near as possible to what we believe to be the long-term optimum. It is not suitable to be used as a short-period weapon.” (“How to Avoid a Slump,” The Times, Jan. 13, 1937, p.13).

whaddaya think?

Spoiled Rotten and Piles of termite wood

Amidst my moaning and complaining about everything, i just saw this video from a blog that i follow that puts things back into perspective.



Glad to be alive.

Now that that spasm of gratefulness has passed: back to the moaning.

A few days ago i ordered the book Termites Turtles and Traffic Jams by Mitch Resnick. Resnick was a computer programmer who wrote a program that turned scientific thinking about a lot of things on its head. Basically he modeled how a particular single-celled amoeba was able to assemble into a smile mold and disassemble from one without some central coordinating cell. Before Resnick scientists tried to locate a 'pacemaker cell' that coordinated the creation and dissolution, much like the pacemaker cells in our hearts and the drummer in a band.

Resnick created a program called Starlogo in which you could program populations of cells with very different rules. He put in a few basic rules that

This is a round-about way to justify why i think there should be an income or wealth cap.

I was reading an excerpt from his book where he was talking about a different modeling project with termites and wood piles. He would change the rules of the little world, such as how many termites were in the arena, how many woodchips they would put in a pile and things like this. He was talking about the ramifications of the different rule systems when he put in a different criteria.

For the most part, these termites would make piles of wood. He could also implement a rule that said that termites could not take woodchips from a pile with 10, 25 or some number of chips already. This drastically changed how many piles were made and how fast.

When he talked of this, I'm not sure whether i thought it or he said it (my perusing on google books stopped) but I thought to myself why he could just put a cap on how many chips a pile can accrue!

Let's say there's 1000 termites and 2500 wood chips. The rules of how termites pick up chips and move them around i thought were just like an economy. People make money (pick up chips) and put them in piles (buy something at a business or into savings or investment accounts). If you say that termites cannot take from piles with more than 10 chips, then you could have a maximum of 250 piles. But there will always be some chips circulating so that limit will never be reached.

In this scenario, there will inevitably be one or two piles of chips with say 50 chips, which is large compared to other piles, and again extra large when compared to the piles of no chips had by some termites.

But if you make a rule that says no pile can grow larger than 30, then what's going to happen is that more termites will have more chips! I don't see any systemic reason as to why this wouldn't be feasible in the economy.

The argument i've hear so far is that a limit on wealth or income would stifle creativity and innovation. But those are individual characteristics, not characteristics of the system.

Already the government is supplying banks with loads of old, new and unmade money not for the survival of any one individual bank, but for the system. It's about time that we start look to literally level the playing field.

What's up with the root?

I miss that light-skinned black guy who used to come on BET news, what's his name? Courtney Malloy. He's so buried in history that it took me about eight searches to verify that this guy even existed. Apparently he was a columnist for the Washington Post. and pretty much all i got was this article on www.blackcommentator.com, which by the way is going out of business. But that was just a reference to an article that is no longer available on the washington post website.

Anyhow. What's my gripe? Well, I am a regular Slate reader. I especially like the column jurisprudence, there's something widly entertaining about how they cover the shenanigans of the supremem court. And perhaps only they can make what the Supreme Court does into shenanigans.

Back to topic.

I'm a regular Slate reader, and i want the same kind of poignant commentary about the world and life from a black perspective. They have a sister-site (can we call them sisters?) called The Root. But everytime i go to the root, i'm sadly disappointed. I don't know, i read the NYT, economist sometimes and a few other online rags that keep me up-to-date. however, whenever I read the root (no longer caps), I'm sadly disappointed.

Most of the stories they have are of the Chris Brown (W) vs Rihanna (L) tragedy. They talk about entertainment and sports. But is that all black people do?

Great, i want a black perspective. But sometimes that means I want an economist who is black, not just some random black guy talking about the economy (me, duh). I'd like a political commentator or seventy who are dissecting the politics of the day, mostly the way the mainstream media does, but who also has the compassion, wherewithal and sense to throw in something from a grounded multi-cultural perspective. I'd just as well like to see the Sino-American or Hindu-American (maybe not Jindal) viewpoint. But it seems that those viewpoints are so niche and pushed to the side, that they can't even be mainstream.

Maybe I'm just spoiled by NYT and Slate. I'm just upset that the Root doesn't have anyone that speaks statistics and translates them into english.

Nassim Taleb on bonuses

1. I was just saying that i was sick of the bailout. and this comes along.
2. I'm beginning to like this guy (Nassim) more than the wizard of omaha.

How Bank Bonuses Let Us All Down

by Nassim Nicholas Taleb

One of the arguments one hears in the compensation debate is that the bonus system used by Wall Street - as John Thain, former Merrill Lynch chief executive, put it - is there to "reward talent". While I find this notion of "talent" debatable, I fully agree that incentives are the heart of capitalism and free markets - but certainly not that incentive scheme.

In fact, the incentive scheme commonly in place does the exact opposite of what an "incentive" system should be about: it encourages a certain class of risk-hiding and deferred blow-up. It is the reason banks have never made money in the history of banking, losing the equivalent of all their past profits periodically - while bankers strike it rich. Furthermore, it is that incentive scheme that got us in the current mess.

Take two bankers. The first is conservative. He produces one annual dollar of sound returns, with no risk of blow-up. The second looks no less conservative, but makes $2 by making complicated transactions that make a steady income, but are bound to blow up on occasion, losing everything made and more. So while the first banker might end up out of business, under competitive strains, the second is going to do a lot better for himself. Why? Because banking is not about true risks but perceived volatility of returns: you earn a stream of steady bonuses for seven or eight years, then when the losses take place, you are not asked to disburse anything. You might even start again, after blaming a "systemic crisis" or a "black swan" for your losses. As you do not disgorge previous compensation, the incentive is to engage in trades that explode rarely, after a period of steady gains.

Here you can see that this mismatch between the bonus payment frequency (typically, one year) and the time to blow up (about five to 20 years) is the cause of the accumulation of positions that hide risk by betting massively against small odds. As traders say, they have the "free option" on their performance: they get the profits, not the losses. I hold that this vicious asymmetry is the driving factor behind investment banking.

If capitalism is about incentives, it should be about true incentives, those resistant to blow-ups. And there should be disincentives to remove the asymmetry of the free option. Entrepreneurs are rewarded for their gains; they are also penalised for their losses. Now, by comparison, consider that Robert Rubin, the former US Treasury secretary, earned close to $115m (€90m, £80m) from Citigroup for taking risks that we are paying for. So far no attempt has been made to claw it back from him - only UBS, the Swiss bank, has managed to reclaim some past bonuses from its former executives.

For hedge funds and medium-sized companies, the incentive problem might be a simple governance issue between private entities free to choose their contract terms. However, when it comes to banks and other "too big to fail" entities, the problem is severe: we taxpayers in our respective countries are funding these global monsters and are coughing up money for mistakes made by bankers who retain their bonuses and are hijacking us because, as we are discovering (a little late), banking is a utility and we need them to clean up their mess. We, in fact, are the seller of that free option. We should claim it back.

The Obama administration has been trying to set compensation limits for banks under the troubled asset relief programme. But this is insufficient. We need to remove the free option. Beware the following situations.

First, those who are taking risks even outside Tarp or society's protection can still be gaming the system - since their risk-taking can result in a collapse, with the taxpayer having to step in. For instance, Goldman Sachs, the US bank, might want to avoid the limits on executive compensation for its managers. That should be fine so long as society does not have to bail out Goldman Sachs (or, worse, its creditors) in the future.

Second, Vikram Pandit, Citigroup's chief executive, while claiming to want to earn one single dollar a year in compensation unless the bank returns to profitability, is still getting a free option given to him by society. He does not partake of further losses; we do.

Third, leveraged buy-out companies used the free option by borrowing heavily from the banks and taking monstrous risks: they get the upside, banks (hence we taxpayers) get the downside. These partnerships made fortunes in the past on deals that society will have to bail out. They too should have their past profits clawed back.

Indeed, the incentive system put in place by financial companies has produced the worst possible economic system mankind can imagine: capitalism for the profits and socialism for the losses.

Finally, I was involved in trading for 21 years and I can testify that traders consciously play the free option game. On the other hand, I worked (in my other job as risk adviser) with various military organisations and people watching over our safety. We trust military and homeland security people with our lives, yet they do not get a bonus. They get promotions, the honour of a job well done and the disincentive of shame if they fail. Roman soldiers signed a sacramentum accepting punishment in the event of failure. This is prompting me to call for the nationalisation of the utility part of banking as the only solution in which society does not grant individuals free options to look after its risks.

No incentive without disincentive. And never trust with your money anyone making a potential bonus.

© 2009 The Financial Times

Sick of the Bailout

Remember the last time you drank too much? You didn't know until the next morning. Right now, with all this talk about the bailout and tarp and the stimulus . . . it's too much. I'm already having a hangover. There is only so much that i can do or say about it:

I don't agree with the bailout.
I don't agree with the stimulus.

I think we should have let the idiot bankers rot. I think the stimululs is misguided.

Of course, there was a fantastic cartoon the other day, i forget where it was though, shoulda tagged it. Basically a homeowner was standing next to their house questioning his wife why he should support the bailout. Well, the house was actually pictured like a domino, in a curve of dominoes. All the houses behind it had foreclosure signs on it, and they were tumbling.

I get it: systemic risk. The bailout and stimulus is more like chicken soup than surgery, it's good for the body (nobody know's why) but not the specific ailment.

But my real question is: nobody did anything illegal? I don't hear about indictments, confessions and deals. The only people on trial seem to be Bernie Madoff and that guy Stanford down in Texas or Antiga or wherever it was. These are our only villans? Nobody in the middle of the Wall Street diaster? Oh, they weren't wrong, just morons.

I'm sure.

But i'm sick of it. I don't even want to hear Obama speak. I want to hear what my state (PA) is going to do with the stimulus monies, excuse me "America Recovery Act" funds. I want the transparency that Obama's putting into place to filter down into each dollar spent.

I want third-level accountability. That means if i get a contract, and i subcontract it out, i have to report how much i'm paying to subcontract it out. This will give us a sense of who skims how much. I'm even glad that McCain is making waves, assailing military cost overruns. Time to reign that in for sure.

I want our gov't to be both penny-wise and pound-wise.

More on the wealth cap

So, the last post was about a wealth cap. The condition behind this argument is the gaping hole in the wealth between rich and poor people, especially in America. The intent i have in proposing a limit on the amount a person can "be worth" is to equalize the chances of people being able to feed and support their family.

I think i've added an option, here they are so far:
Cap income
I would limit the amount a person could earn in a year. 1 mil is too low. how about 10 million? But that is just for business owners. What if we limited total compensation from a company to 1 mil per year.

This would force down salaries of business execs, and on down the line so that more wealth could be spread

We could also configure it so that the highest paid person in the company can earn no more than some multiple of the lowest paid person. If the lowest paid person earns $30,000, a 30x multiple would get that highest paid person $900,000.

Cap total net worth
We could alternately cap the total amount of money a person was worth. If they earn more money, they have to spend it, which pumps money into the economy. We can cap this at somewhere around 50mil,

Abolish trusts
One of the strategies that the rich use to protect their wealth for future generations is to create trusts. Trusts are tax-shelters enabling people to put their money in an entity and dispense it in such a way to minimize taxes, and to avoid the estate tax. I would abolish them. This line of thinking actually has libertarian roots in that it encourages each individual to work to their maximum, and not ride the coat-tails of generational socialism.

Increase the estate tax(new)
This comes with a little subtly. If the assets to be taxed is a owner-operated business worth less than 10mil, then i would think about abolishing the estate tax. I think this is a good cut-off to insure the financial stability of small businesses in succession agreements.


Okay. So there are no real breakthroughs, i think sometime i'll have to sit down and think each of these through more seriously. keep watch.

Minimalism

A good friend was complaining that nobody wants to hear that we have to save money. Not Wall Street or the people on Main Street (Market if you're in Philadelphia). He aptly says " . . want to still have their toys". I agree. Having been unemployed for a while, and not a big spender i know this intimately.

I only have two credit cards, both of which are half full, and I only got those so i could build up a credit history to buy a house. So my credit history, besides student loans, is only about three years old. I haven't bought a new article of clothing in nearly a year. I don't save much however, i spend it on my three best friends: Sailor Jerry, Jack Daniels and Jim Beam.

But i realize, as my friend does, that we can't have our cake and eat it too. We can't get the economy pumping again because we have to pay off the credit debts we're already in.

The bigger problem is that now Uncle Sam is doing the same thing that got us into this mess: borrowing money. The medicine that nobody wants to swallow is that we have to cut spending drastically. We have to batten down the hatches and weather the storm. Think about it. 2.5Trillion in consumer debt. That's a monkey on our backs if there ever is one.

In the hearings, Secretary Geitner said they had to manage the sweetspot between pumping enough money into the economy to stop the hemorraging but not enough to create a bigger disaster. It's like surgery, taking a sharp instrument to cut around and extract a bullet. Consumers will have to play the same game (operation). We have to manage paying down our debts, saving money and buying at least the goods. The world of three TV's in a house, new cars and disposable clothes are over.

The problem is that nobody in Washington, Wall Street, Main STreet or Market street is realizing this in public discourse. We're silently moaning about this to themselves everytime they look at their bills.

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.

Trickle Down Obamanomics

So, apparently people have been heeding my warning. I have been saying for a little while on this blog in this post that the disparity in incomes has got to stop. I say the thing to keep an eye on was the multiple. What i mean by the multiple is how much a top-level executive makes as a multiple of how the least compensated person in the company (janitor, etc) makes.

Over all but the last couple of decades, the most highly compensated person made let's say 20 times what the lowest paid worker makes. Now, we see compensation packages of up to 570 times what the average worker makes. You can find good info here , here and here . And you wonder why the rich keep getting richer?

So, recently Emperor Obama has decreed a limitation on the total compensation an executive can get if their company receives bailout money. This is a great slippery slope I detect. I hope, really really hope, that somewhere and somehow that this extends not just to companies who take bailout money, but all companies doing business with the federal government! before we get to that though, let's look at this.

So the companies that take bailout money are restricted from getting extravagant compensation packages for their 'best and brightest'. One consequence of this can be that a company that takes bailout money will shed good, mediocre and bad people like a butterfly sheds its cocoon. Now you have an over-saturation of people who want to be employed as finance gurus who will take lower and lower wages. But their wage demands will compete with one another to lower the bar on compensation.

The other option is for these folks to go abroad, as a friend from Goldman Sachs proclaims, as its easier to make stupid amount of money fleecing the locals. I say good riddance to these robber bankers. So in the short-term, i think executive compensation will reluctantly plummet and the multiplier will drop from some over 500x the average worker's salary to somewhere closer to 100x the average workers' salary. This will then create downward pressure on the luxurious compensation packages of the next lower and lower tiers. this will never reach Peter Drucker's (management guru) 25-1 ratio, but it'll be something significant.

I think to accelerate this trend, what Obama should do is to spread that cap to all companies doing business with the government. I mean if we're really about saving taxpayers' money, how come the CEO of Lockheed Martin gets 24mil a year (757x average) while living off of 80% of the revenue coming from government contracts? I think to really save the government a good bit of money, Obama should spread this ceiling over a wider swath of the economy by extending this ceiling to all companies that do business with the government.

I am against the government bailing out the economy. I think if you really want the economy to pump again, you have to seriously re-design compensation. If the government put a multiplier cap on ALL executive compensation, then there would be a hell of a lot more payroll money to spread towards the bottom of the pile, as well as around. Think, you pay one man the salary of 757 men? What if you cut that in half, you could employ another 300 depending on their skill sets.

Even if driving down the ceiling of executive compensation doesn't immediately spread to employing others. The incresed savings on compensation at least puts money into these banks, which in turn they can lend from.

So I'm all for putting a ceiling on executive compensation. This 'tricke down Obamanomics' would take a serious bite out of the windfall money these executives get. I'm just scared that this has no teeth as no company 'in their right mind' would take anymore bailout money.

Homo Economicus Must Die

So, there's a depression setting in, not just a recession going on. It seems that the news media, business people, economists and everyone reading what they have said are stuck in the same trap. They think money is the problem and money is the solution.

"No problem can be solved from the same level of consciousness that created it" -Einstein

I'm sure that someone else said it before, but he's the one that got the quote. And the way he says it is kinda quippy.

The problem with the recession and all the talk about economics is that it is one-sided. The underlying assumption is that growth is good and so is employment. That may be true, but what industries grow, and what are people employed doing? We know that there are many many problems with out economy. We are losing our manufacturing base, the biggest employer in America is a temp agency! So even if people get put back to work, that's only important in so far as they can buy more stuff. Sure, there's lots of considerations such as food, electricity and clothing. But the assumption of the American isn't just providing himself or herself and their family with basic needs. The assumption of the American is that they'll go out and half-recklessly buy things they really don't need (cable, larger flatscreens, new furniture, trips to hawaii instead of the museum . . )

That's the level of consciousness we're in. We want to employ people, but only so they buy things, not so that they have a sense of purpose in life. We employ them so they spend. We employ them "for the love of money." There's no talk about human development, purpose, usefulness, contribution and the like.

What happened to the Pursuit of Happiness over the Pursuit of Luxury? The media has succumbed to the paradoxical seduction of statistics and talks about development only in economic terms.

We need something else. The green movement hints at this. Their elevation of near aseticism through being energy efficient and low carbon footprint will eventually call into question mass consumerism itself. We will have to ask what will replace shopping and displaying our financial conquests as a national pastime?

I don't know. I figure it would have to be something new, different. Perhaps the old pastime of conversation. You could say that American culture was built in the time between work, when parents talked with and schooled their kids. Where neighbors would have each other over for dinner. Perhaps the death of Homo Economicus will give way to Homo Sapiens.

I'm not saying i have the answer. I'm just looking ahead and seeing something cloudy, trying to convey to you that at sometime the beast Homo Economicus will be slayed and humanity will have a new expression/master. I'd just like to know what it is.

Perhaps for once we will have a conversation about the actual quality of our lives, not just in terms of physical things, but our intellectual, social, moral and spiritual lives. Sounds good to me.

why there is a credit crunch

Money is too cheap.

Let's talk supply and demand. When i sell eggs, let's say they're normally priced at $2. Let's say i go to the market and mark them at $2.50. nobody is going to buy them because they're too expensive. I mean with a dozen eggs, people are price sensitive. If i go to the store, and the grocer says that i have to sell them at $1.50, then i'm not going to sell them because i can't turn a profit on them.

So now what? And what's this got to do with the credit crunch?

Well, the Federal Discount is what, .50%. Which is zero for real. A year ago it was 4%. This is the rate that the fed charges when it lends money to banks. The banks then lend money to everyone else, at prime rate, which was 6.5% a year ago and 4% now.

Now what bank in their right mind would want to lend money at 4%? There's no supply because the banks won't make ANY money at that rate. At 6.5%, those were profit margins they could work with, but 4%? That doesn't qualify anyone for a loan except those who have impeccable credit. Banks charge higher interest rates to people with bad credit, so if they have to write-down money on a loan, they write most of it off. But they make less money on lower interest rates, and can only write down less money.

So the Fed has made money so cheap, that it is unprofitable for banks to lend to people.

The other consequence of this is that the only credit available are the high-interest rates of credit cards. So now you borrow money at 15% instead of 6%. This further taxes the underpaid American worker and consumer. Apparently, the people with all the money consistently want to fleece us broke folk.

I was talking with an old friend on how I think there should be a limit on the percentage of debt a person can take on. Just like new mortgages, you have to have verified income, and when you borrow, you can only borrow enough to spend some proportion of your income (28% i think). I think this should be extended to consumer credit also. That means that no matter how much you earn, you can only borrow unsecured credit to the amount that you repay is no more than 20% (or some number) of your income. This creates a ceiling of debt. I think this will be good for the consumer. This is a pro-consumer measure, not a pro-business measure. A loophole for this is that someone can get a waiver if they borrow against some asset aside from their primary home.

The credit crunch will continue until the fed raises its discount rate to about 3%, then lending could be profitable for banks. When that happens, more businesses will get credit to go into business, selling us crap that we buy with credit cards. I think to prevent our country from disaster again, we need to put a ceiling on the amount of credit a person can hold, indexed to their income. We can also factor in the value of their assets if they need more credit. In effect, they could get a line of credit based on the value of some asset besides their primary home. Oh yeah, did i say that we should abolish home equity lines of credit? Yeah, we should.

houses houses everywhere, but no one to live in them

I read two articles today so i could prove a friend wrong. we had a discussion, on the way to the inauguration, about housing prices. My position was that housing prices have been way above historical averages for the last 20 years and need to be reset to those levels. Her position was that housing bubble doesn't need to be deflated back 20 years, but to the start of this bubble. I felt a little vindicated when i searched on google for the info i was looking for: historical prices of houses. The graph below has them both adjusted for inflation and not.
You'll see that 20 years ago was the little blip right before the stock market crash of '89 and the ensuing recession for the next five years. One of my arguments was that the low interest rates of the last few years fueled a lot of people trying to buy houses that they just couldn't afford, or to use the presence of cheap money to flip houses, further pushing up the price of housing for everyone.

She said that the market needs to correct so that people can buy houses at their current prices. And for this to happen they need low interest rates for them to do this. This was the point in the conversation where i said "if they can't afford it at eight percent, they can't afford it at four". It's my opinion after reading a little from Ludwig Von Mises of the Austrian School of economics that the variation in interest rates is what creates boom and bust cycles. The pedal and brake that Greenspan expertly applied to speed up or slow down the economy caused it to spin out of control.

So it's my opinion that what should be happening is that we actually let the housing market tumble. You may think the alternative is to let the 'economy slide' and unemployment go rampant. Somewhere embedded in trying to stop the fall of housing prices is to stick people with mortgages they can't afford! This can then turn into another bubble being burst. I'd rather stick with one long one than two a couple years apart. The question isn't when we reach the bottom, but do we make a pit stop on the way down?

The other article that i read was about the decline in housing starts. The gist of the article is that we've build way more houses than we have people. We have about 1.3 million vacant homes. that is with no bodies to fill them. Even if everyone bought the home they are in, we'd have the vacant homes. So what we have to do is to stop building so many new houses and let the people we have (through going out on their own and immigration) fill the houses through sheer population growth. This means that with the slide in about 700,000 houses per year, we would expect the contsruction market to catch up at about early 2011.

One thing on this i mentioned to my brother is that our new president should instruct his agencies to give preferential lending and treatment to building for density and not sprawl. With the considerations of energy running rampant, we find it much easier to support urbanization than sprawl (which promotes gas guzzling long trips to stores and work). This may in the short term have as much an impact on hybrids and electric cars.

So what i would like to see in the mean time is a slow pre-emptive creeping back up of the Fed's prime rate. If banks aren't lending because money is cheap, they won't lend if money is expensive. We might as well set a stable number for interest rates for the next five years so people can plan around it.

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.

typalizer

i just happened upon a link to the typealyzer website. It analyzes blogs to figure out where they sit on the Myers-Briggs typology scale.

I'm an ISTP, or rather my blog is an ISTP. Not bad, in college i was an INTJ. So this means that i'm more connected to the world than my intuition, and i'm less judgmental. Not bad. Not good either. Just is.

being in communication

So this weekend i helped out on production for a communication course run by Landmark Education. It was fantastic. I already took the course, and it was nice to be able to be a gadfly enough to be able to leave the room, but in there enough to sample the course again.

What i want to talk about is the different perspectives of NLP and LE (Landmark Education). They both deal with humanity, NLP deals with a more scientific/epistemological filter, while LE takes the metaphysical/ontological tack. Both 'systems', if you will, look at the development of humans as individuals, and as communicators. NLP focuses much more on developing effective communication skills than self-development.

NLP suggests that highly effective communicators are adept at creating rapport with people. This means that they can create an experience of familiarity with others. NLPers came to this by looking at and imitating the behavior of highly social folks. What they notice was that people who were in rapport, performed similar behaviors, gestures and sometimes in a nice little rhythm.

What's weird is that people are cautioned to not literally mimic the actions of the other person, but to do miniature motions that approximate the gestures of the person they want to be in rapport with. This is funny, because apparently people have a filter that tells them when others are mocking them, and matching (what NLP calls it) the person's behavior might set of these alarms.

LE, on the other hand, asserts that being in communication or affinity is a way of being, not a set of gestures. A more new-agey take would say that a 'way of being' is the way that your consciousness resonates (pun not intended) throughout your behaviors to influence it. So when you are being related to someone, you overtly and subtly behave in a way that that person picks up on your comfort and connection with them, but they probably couldn't put their finger, nose or ear on just what it is about how you're acting that tells them your comfortable with them. As opposed to, say, you doing the same things while being bad. It isn't the inflection of the voice, its the inflections of the inflections that resonate and broadcast our 'way of being' or emotional state. [note to reader: i wrote the section you just read after having written the section you're about to read]

Both of these positions seem different, and seemingly irreconciliable. But i think the clue is something i learned in high-school chemistry. My teacher (a real nerdy physicist with a sense of humor, man i forgot his name) asked us when we were learning about waves and stuff "if a flute and a piano both make the same note, let's say 'middle C', why do they sound different". I blurted out sub-cycles somehow, and he said 'correct'.

what?

Yeah, notes vibrate at different frequencies. When two different instruments make the same note, the vibrations have their own set of vibrations (see fractals if you're bored). I think this gives a clue as to the seeming discrepancy.

So, if i'm being angry, then my behavior is going to go one way. But if i'm being delighted, then my behavior might go another way. I'm asserting that even if i perform the same 'exact' gesture while being those different states, you'll be able to tell that there's a difference between the two 'mental states' or 'ways of being'.

What i'm supposing is that embedded in human behavior, there is another layer of behavior that's a little deeper than we may be able to consciously notice. Sure, i can 'sound' like i'm delighted or angry, but that may not be the case. How you can know when i'm faking is the fact that you can pick on the 'sub-cycles' of my communications.

I think that's all i wanted to say. That being an expert at creating rapport, attempting to not 'be in rapport' has a limit past which you cannot go because the NLPers are unable to convince the other person of their 'congruency' without actually being congruent (word choice unintended).

network of conversations 'bout marriage

So, i'm engaged. And i was exchanging messages with an old friend on facebook, and she asked why i didn't respond to her "congrats". At first, i thought not much of it and said that i started to take the congrats for granted. Then i left it at that.

Not two minutes later i realized why i take the congrats with a grain of salt. What happens is that i find that a lot of people my age are getting married. And, it seems that people i know about ten or so years older, are getting divorced. So it seems like people are getting divorced like its a new pair of hot shoes. And i don't want those shoes. So i'm a little scared (when looking from the outside, at statistics, not from the quality of my relationship) that it's predictable that i'd get divorced sometime in the future.

I thought a few seconds later (and wrote this too) that saying congrats to someone getting married is like congratulating someone on getting a new job at Ford or Goldman Sachs. Granted, the job is great, but the environment surrounding the job seems toxic. knamean?

Now, about being married for a long time. There's a group (i'm too lazy to find them) that tape record a couple having an argument, while hooked up to all kinds of machines which measure heart rate, blood pressure etc, who can predict with like 90% accuracy whether a couple will stay married or get a divorce. Apparently, how people habitually react to the other person's communications stabilizes, and if their reactions are negative, then it predicts a tumultuous relationship leading to divorce.

My remedy is my knowledge of communication that i've learned from Neuro-Linguisitic Programming (NLP) and my experience as an introduction leader for Landmark Education. Both of these technologies/educational methodologies place a premium on open, honest and flexible communication. I figure that i'm a bit insulated from getting stuck in too many patterns, cuz i see them in a matter of weeks (even though sometimes i leave them alone, and don't do nothin about them). So i figure i'm good. But that's just my opinion. The proof will be in the 50 year anniversary. 2059, here we come!!!

busy busy busy

I worked on the Philadelphia Marathon last week(end). I also told my friend Johnathan that i would do the Philadelphia Triathlon with him in June. Right now I'm leaning toward doing the sprint triathlon, but in the back of my mind i'm thinking that the sprint triathlon is for suckers, i might just do the whole thing. The thing i've got going for me is that i'm a decent swimmer, and apparently that's where people's weak points are. Since i only have to quicken how i swim, i think i might be able to remotely place, nothing significant cuz my running and biking would be sub-optimal, but still, nice prospects. I even bought goggles!

***
What else? I'm committed to writing articles for my website. I set my pace at one per day. I've got tons to say, so i might as well get writing. I also realize that this is a little slow, i should be aiming for like 2-5 per day since i don't have anything else to do. I wrote one this morning on communication. umm. And i want to scrap the whole thing and rebuild it. i don't know why, i just do.

***
I'm starting to talk more to my fiancee. I realize (after she tells me of course) that i don't talk to her a lot about the things going on in my head, so i'm making more of an effort to be in communication with her about things. It's not as hard as i thought. Though secretly i don't want this communication to get her into my decision-making process, just more of a sounding-board. That's because i'm a man, and men are more comfortable making solitary decisions . . . or at least that's the story i'm sticking to.