Rove is a douche

Posted in response to this op-ed in the WSJ

Is Rove serious? Since when was putting more troops in Afganistan considered an anti-terror policy borrowed from George Bush? It is, in fact the opposite of Bush policy. Bush took troops *out* of Afghanistan to put the *in* to Iraq. Calling it a "surge" is semantic. Any troop deployment could be called a "surge" by that standard. His quote from the Washington Post is totally out of context. The full quote: ". It is difficult to imagine a truly level playing field that would simultaneously produce benefits from a government-run system. " the article goes on to say "Medicare keeps costs under control in part because of its 800-pound-gorilla capacity to dictate prices -- in effect, to force the private sector to subsidize it. Such power, if exercised in a public health option, eventually would produce a single-payer system; if that's where the country wants to go, it should do so explicitly, not by default. " I wouldn't call Medicare's negotiating power a "subsidy", since the private sector has the power to reject it's offers, but it is clear that the article does not dismiss public health care. I am not surprised that Rove is completely misleading in this article and I encourage others reading his editorials to challenge the "facts" he presents to support his case. I'm very disappointed in WSJ to continually have Rove editorials without sufficient editorials from an alternative viewpoint. Perhaps an editorial from John Stewart is in order.

Hoover and the Great Depression

Excellent reading on the anti-market intervention promoted by Hoover to keep wages artificially high and its effect on the Great Depression.  It contains a great argument against wage floors and other government intervention that artificially prevents markets from clearing.  

Finally!

I was relieved to discover this post on the Capitalism Blog.  It's reassuring to discover that other people have like-minded sensibilities.  

To paraphrase Gordon Gecko: Greed, in a word, is what makes capitalism work.  If we take "Greed" to mean "Self interest", it is also what makes evolution work in a Darwinian sense.  The fittest survive, while the weaker wilt.  As illustrated in many socialist societies, e.g. USSR, Venezuela, Cuba, Iran, etc. extreme socialism does not work as it works against the all too human psychology of incentive for work and requires military force to enforce its ideals.  Therefore, to condemn the recent financial crisis as an excess of greed is to condemn human nature, and the very process that made us humans.  

People who work for banks are employed specifically for their ability to make creative deals that are profitable to their shareholders.  In this instance, the internal controls to ensure deals made were consistent with long-term profitability were faulty -- most likely due to a misunderstanding of the risks involved due to a common mistake in interpreting statistics.  This will surely lead to private firms correcting such controls and tying reward to shareholder value.  We don't need more government regulation to tell banks what they already know: there is a fissure in the system that can cost them (and taxpayers) billions.  

Sucker's rally

Andy Kessler, a former hedge fund manager turned writer, says in the WSJ that the recent stock market run was a "Sucker's rally".  Of course, with 20/20 hindsight over the past couple of days this appears to be a correct assessment.  

Stock markets do not always reflect the fundamentals of the economy.  Just because the Dow goes from 6500 to 8000 doesn't mean the economy is all better now.  Jobs are still being lost in the hundreds of thousands every month.  Fundamentals haven't shifted, perceptions have.  Instead of proselytizing doomsday, investors have jumped on the bandwagon of rising stocks expecting to ride the wave back to 14,000.  Such expectations are misguided.  An handy rule of thumb is to watch the forecast Price to Earings (P/E) ratio.  Although forecast earnings may be an inaccurate gauge of performance, historical earnings may be even less accurate.  Many forcast P/E ratios were recently trading around 15, which indicates that investors are willing to pay 15 times what they expect shares a firm to earn in the next year in order to own its stock.  For many "value" companies, that is an aggressively high price.  A more reasonable level would be something like 10 or 12, or even less if earnings are uncertain (like they are now).  

Another important consideration not mentioned in the article is the newly enacted regulation restricting short selling.  After the rampant "naked" short selling that constributed to the collapse of banks like Bear and Lehman, regulators have sought more ways to prevent pessimists from betting against the stock market.  Surely many investors would happily short sell shares but are unable to do so.  This will keep prices at an inflated level for longer.  This recession has a long way to go before it's over, and cautious investors should be aware of the risks ahead.  

Cash for Clunkers, eh?

The upcoming program "Cash for clunkers", a US government sponsored program to replace old gas-guzzling cars with newer fuel-efficient ones, is another example of good intentions fouling up free-markets.  By creating a program that overpays for cars that otherwise would fetch a trivial market price (or would not be bought at all), the government is creating an incentive for people to buy cheap cars and sell them for higher than market value.   This incentive will "crowd out" buyers of cheap vehicles in the private market (read: young people looking for their first car, hobbyists, the unemployed, etc).  

I predict that at some point when this program becomes publicly acclaimed (my guess is many don't yet know about it) a portion of the used car market will get absorbed into the government's bloated budget.  While this may not impact everyone negatively, it may affect less affluent car buyers by reducing the inventory of used cars they might be able to afford.  Surely, it is politically popular with environmentalists.  However, it is unwise to interfere with supply and demand without properly investigating secondary effects on market participants.  Considering that the government is also spending lots of taxpayer money to assist the unemployed, this program seems potentially at odds with its programs to encourage employment (cars get people to work).  

Four Billion dollars is a drop in the bucket of approved government bailouts, but every dollar of taxpayer money should be thought out before it is spent.  This is one item in the federal budget that could be better spent.

Loss of an American Hero

Jack Kemp died this past weekend, but his ideas continue to resonate today.  His legacy reminds us that capitalism does not exclusively benefit the rich, nor is it at odds with populism.  As a "bleeding-heart conservative" he believed that America was built on the idea that every citizen can benefit from the freedom to work, earn, and save as they see fit without overbearing intrusion from government.  Rather than naming regulation as a savior of the people, he recognized it as a scourge of the small business owner.  

By giving people access to capital and allowing them to take ownership of assets, entrepreneurship will be encouraged and the cycle of poverty can begin to be broken 

--Jack Kemp

These are words by which we shall build our nation.  

Chrysler "deal"

The Chrysler bankruptcy is morally bankrupt government middling in the auto industry.  How on earth the employees of Chrysler can OWN their company by being so overpaid and incompetant that the firm is forced into BANKRUPTCY is the question of the century.   I am sorely disappointed in the Obama administration, and the lack of justice in the American government.  Saving jobs at any cost to the investors of capital in this country (real American heroes) is a travesty that undermines the primary freedoms outlined in our Declaration of Independence.  

As justice Stephen Johnson Field said in the case of the Butcher's Union vs. Crescent City:

Among these inalienable rights, as proclaimed in that great document, is the right of men to pursue their happiness, by which is meant the right to pursue any lawful business or vocation, in any manner not inconsistent with the equal rights of others, which may increase their prosperity or develop their faculties, so as to give to them their highest enjoyment

Depriving bondholders, penion funds, hedge funds, and other investors of their right to pursue their business interests is injust and unAmerican.  Taking their legal claims to the assets of Chrysler and giving them to those most responsible for the failure of the company is disappointing and deplorable.  I hope that this is not a sign of what we will see in future government interventions.  

Buy vs Rent

This Economist article frames an argument discussing the positives and negatives of home ownership, and exposes some myths about it as well. I think it's a good read for anybody considering the merits of home ownership as well as policy makers in favor of housing subsidies. I believe, as the article states, that lots of Americans have become too dependant on their home equity as a source of investment and savings to the extent that many do not invest in other assets.

This is potentially a bad idea for several reasons: 1) insufficient diversification 2) as more people buy and sell homes more often, the housing market becomes more volatile 3) by purchasing homes "on margin" any downard shift in the housing market is magnified in terms of losses incurred.

Fortunately for many, there have been relatively few dramatic downward shifts in the housing market. As we see from the crash of the recent housing bubble, downward shifts do happen. People should take the necessary precautions to ensure that when housing market downturns occur, they have other savings.

Let them pay

Goldman wants to pay back their government funds. As long as the government's newly imposed restrictions on how banks can choose to run their business applies to any acceptor of government funding, this is likely to trigger other banks to do the same (even if they are not in as good a shape as Goldman). It is likely the opposite of the government's intention when the funds were issued. Persuading all banks, regardless of relative strength, to accept the bailout money was intended to camouflage bad banks from their healthier cousins. Forcing the healthy banks to reject bailout money by placing restrictions on them post-hoc is going to expose those bad banks sooner than they otherwise would be. This is likely to be a good thing if we are to identify and resolve the problem of insolvent banks with zombie asset on their balance sheets.

Division in America

I think that the "tea parties", if they were intended to be a legitimate protest were laughable in terms of execution and ideology. More unfortunate than the embarrassment I feel for those who participated in the wearing of pointy triangle hats and tea-bag touting, is the hypocrisy of prominent conservatives (hannity, et al) who go from dismissing all criticism of the Bush administration as "un-American" or "emboldening terrorists" to supporting protest of the Obama administration as "Patriotic".

It's the division and polarization of America that I find most dangerous. Where the fuel for the hatred comes from, I'm not sure. There are some obvious candidates, like Fox News or Conservative Talk Radio of Rush Limbaugh and his ilk, but I believe that these are mere symptoms of something deeper. When only 85% of Americans obtain a high school diploma and only 27% receive a bachelor's degree, I think illogical anger is an expected result.

I have long denied being a democrat, but I'm not republican either. I'm a laissez-faire capitalist with liberal social values. While I do not agree with many of the conservative criticisms of Obama (comparing him to Hitler is a big stretch), I have my reservations about any politician who believes he can solve any problem by taxing and spending. My beliefs stem from what I see in the federal budget, anecdotes, and my personal experiences with government agencies. There is a ton of waste in all government operations, and government bureaucracies are often ineffectual. I think that it is in the best interest of all citizens if government makes itself as scarce as possible while providing services that are not well managed by market incentives, e.g. Health care, military, basic welfare, etc.

In some cases, government is not just inefficient but grossly distorting to an otherwise healthy market. One example is the mortgage incentives given to Fannie and Freddie (by Congress) for issuing subprime mortgages that lead to the financial crisis we're in now.

As for taxes, I can agree with a progressive tax system, but I don't agree with wanton spending at the expense of American taxpayers (even the rich ones). The more we tax rich people, the more we will be a) pushing more money into tax shelters or b) driving away wealthy citizens who can pick and choose the jurisdiction in which they want to live. This is happening at a local level in the NYC tri-state area -- lots off people list their primary residence as Jersey (even if they live in the city) to escape city income taxes and lower their state taxes.

I'm not saying I personally want to pay less taxes -- I don't mind paying taxes that go to well thought out, worthy causes. Most taxes are paid by rich people anyway. My gripe is that the government does a lousy job with taxpayer money, and they have no incentives to get better at it. Bad politicians end up landing jobs in the private sector firms (the ones that lobbied them in office) and Good politicians cozy up to their largest donors so they can keep winning elections. Nobody looks out for the little guy.

Castles made of sand

Economist article blames federal subsidies for housing bubble. I agree emphatically. In fact, I believe the financier's aggressive (some say greedy) actions in creating CDOs for risky mortgages were the market's natural reaction to the aggressive lending by Fannie and Freddie and that the housing bubble actually has little to do with financiers' actions. There was some misinformation due to the miscalculation of risk on the part of the credit rating agencies, but this is part of the problem inherent in basing risk forecasts on past performance. We need a new way of predicting the future.

Investment predictions

My new long term investment strategy is to wait until the next big fallout of the financial markets before investing. I still don't think we have hit the bottom. Housing prices are still in decline, meaning foreclosures are sure to mount, and jobs continue to be lost faster than they are being created. I have not tested if there is typically a lag in these statistics being reflected in asset prices or vice-versa, but my intuition tells me that there is likely to be a lag between unemployment rising and company earnings falling. This, therefore implies that when lower earnings are reported the stock prices will fall more. There is the potential that markets predicted lower earnings than were actually reported, and therefore this rebound is justified, but I do not think this is likely.

I predict the Dow will return to its low of 7000 later this year and will continue lower before bouncing back, likely in mid 2010.

Who is looking out for us?

Dear Sir,
I'm an American of modest means, yet I do not believe that higher taxes on the rich will benefit me or my family. My disabled grandmother, who had a stroke several years ago, is living off of her meager Social Security pension and requires help in all of her routine daily tasks (eating, moving, bathing, etc). She cannot afford to pay a professional to care for her, so my mother drives to her house 3 times each day to help. Her only asset is her house, in which 2 of her children still reside. If she opts for publicly subsidized healthcare via the Medicare program, she would have to turn over her house to the government. Laws stipulate that even if she signs over her house to her children who reside there, the government can still claim it if she opts for Medicare.

My point is, that even though the government has subsidized health care for elderly/disabled people like my grandmother, they haven't done a very good job of improving their livelihoods. Throwing more taxpayer dollars at the problem would not necessarily make things easier for us of modest means unless there is some accountability in government and incentives for our representatives to improve standard of living. While more funding may help, funding itself will not find its way to those most in need while politicians remain self-interested. Poor politicians can ignore public sentiment while getting cozy with the private sector to land a job after their first term. Career politicians must consider their campaign contributors before they can help the electorate to whom they owe their service. Therefore, who is looking out for us?

housing prices low, but not low enough

Last night I spent a couple hours trying to compare median salaries to the cost of a mortgage in 1960. Amazingly, I was able to find data (I love the Internets) but I still wish I had seen this article before I wasted my time.

See article in WSJ

Financial bailout vs Auto-maker charity

Bailing out "Wall Street" was not a choice. It prevented the systemic breakdown of the global economy, which anybody in their right mind would agree is a worthwhile cause. It was not a handout to "well-heeled moneymen", it is an investment in the future of capitalism across the globe.

While it may not be immediately apparent, every large corporation in the world relies on credit. All manufacturers need factories, retailers need inventory, and newspapers need paper to print on. Where else would they get the capital to invest in such raw materials if not for their ability to borrow money periodically? The most common answer is the credit market -- a market which, prior to the bail out, was nearly nonexistent. Enabling companies to borrow for the sake of investment in these much needed capital goods was the spirit of the banking bail out, and everyone on earth is a beneficiary.

On the prospect of an automotive bailout, we are considering essentially donating taxpayer money to a small group of long unprofitable manufacturers, namely the American automotive industry. The major reason why these manufacturers are unprofitable is due to the contracts in place with the United Auto Worker union (UAW). In those contracts, there are clauses that make it nearly impossible for the companies that employ UAW workers to relocate, downsize, or otherwise reduce the amount of money they are paying their employees. These contracts make the American companies far less competetive than other car makers, like Toyota and Honda, by almost doubling the cost of labor per vehicle.

If we let these companies go bankrupt, then perhaps the union will realize they must reconcile with reality and grant concessions to their employers. On the other hand, if we allow our government to give hand outs to companies that are not profitable, then we are only prolonging the inevitable bankruptcy. We must allow these companies to go bankrupt so that more efficient organizations can take their place, like Toyota or Honda.

The idea that we can use a government handout as "leverage" to get the car industry to make cars we want is short-sighted. Car companies want to make the cars we want (fuel-efficient or otherwise) because we pay them good money to do so. American car companies haven't been giving us what we want because they can't make them without losing money. Therefore, they need to be restructured in order to be capable of giving us the cars we need for the same price their competitors are. Bankruptcy is one way of enabling a restructuring. That's not just sustainable economics, that's common sense.

As for the notion that the inability of GM and its ilk to give us the cars we demand is not the "workers' fault", thereby justifying a bailout, is also illogical. The workers' representatives have placed unreasonable demands on their employers, and now they are realizing that their compensation does not exist in a vacuum. There is a tangible effect on the sustainability of their employment by demanding the lavish benefits and pay they continually extract from their begrudging benefactors.

On the price of homes in NY

My father worked as a baker in a bagel store for 30 years with a bachelor's degree he never needed and was able to buy a home in the suburbs of NY. Yet, 20 years later, that same home is beyond the means of his well educated son who has a salary well over the pay his father was making when he purchased that home (even adjusting for inflation).

It is not unreasonable to expect home prices to rise slightly after inflation, but speculative house prices compounded by low interest rates (which make house prices higher) have driven real estate to levels unaffordable to all except those with wealthy families, the very diligent, and the insanely overpaid (read: wall street big-bonus types and their lawyers). The American dream of making a modest living and owning your own land has all but left the NY metro area.

Adam Smith would be puzzled... The population of the NY metropolitan area in 1980 = 17.5 million , and the population of NY state in 2000 = 19 Million -- it certainly seems that demand has increased a bit, but not drastically so. Unless the urban sprawl effect was substantially offset by the destruction of tenements and affordable urban housing, to the tune of ~1 million homes, this indicates a bubble.

I predict we will see the housing market in NYC and its surroundings plummet in the coming years after laid-off financial workers are forced to find employment elsewhere and sell their Manhattan pied-a-terres, Long Island summer homes, and Northern Jersey tax shelters.

Already the renting market has dropped -- several of my classmates indicate rental apartments in their building went from $1600 last year to $1200. This is just the beginning. Once severance packages, savings, and tenacity of the current residents run out, the floodgates of affordable real estate will open. However, it will take at least until the end of 2009 and beyond for the shake out to finish.

On unions

There is a time and a place for unions. Unfortunately for consumers, the time for most large unions has long passed, yet they remain even more powerful today than they ever were.

Organized labor is most well reknown for extracting concessions from greedy employers. What is less talked about is how today's unions, particularly in the automotive industry, construction, and government sector, have extracted luxurious working arrangements at the expense of the common man. Each concession made to unions is paid for by raising prices and/or taxes.

Eamples of the cost of regulations imposed by unions being passed onto consumers are:

the cost of renting an apartment in NYC ($1,900) costs more than most mortgages in America ($1403)
metro systems across the globe face unjustifiable fare hikes
GM hasn't made a profit since 2005

It's about time somebody spoke up about the dangers of organized labor excesses and where the line exists between a dignified wage and destructive extortion.

The Fed

The Fed is the most powerful part of Government that is not elected. Federal Reserve Chariman Bernanke is a wicked smart guy who could make a ton more money if he played the financial game rather than serve as the Dungeon Master, hence he's not out to make a quick buck. The problem is Congress.

A bad Congressman has only 2 years to make a quick buck, shmooze with some corrupt businessmen, then land a job in the private sector -- hence they have no real stake in the outcome of government. Good congressmen have a lifetime of reelections to think of, making them just as fickle as a bad legislator in their search for campaign funding.

To top it off, when people elect uneducated, cronyist neanderthals who pander to every partisan pulpit point, we do not have a proper representation of The People's interests. We need more people like the Fed Chairman and less like the scum sitting in on Capitol hill.