Monday, May 18, 2009
The Schaude – The award for the most satisfaction or pleasure felt at someone else's misfortune (aka Schaudenfraude). The nominees are:
The Real Wives of New York City – A pack of See You Next Tuesdays who prove the theory that you can marry in twenty minutes what you couldn’t make in sixty lifetimes and turn out to be pleasantly miserable.
John Edwards – Also nominated in the following categories: Top Lawyer Jokes, Favorite Surprise Guest on Oprah, Penises to Watch in 2010.
California – How to turn the world’s eighth largest economy into Mozambique and still think you’re better than everyone else.
The Boston Bruins – Go Sox!
The Kaczynski – The award for the most entertaining fringe activist. The nominees are:
Paul Watson – When Greenpeace kicks you out for being too nutty the only thing left to do is get a TV show called Whale Wars. Captain laptop of the MV Steve Irwin is a curious cross between Quint from Jaws and Ghandi.
Octomom – Nadya Suleman doesn’t seem smart enough to be a big time activist but she’s crazier than an inbred squirrel and has been on TV a lot. For those who are cuckoo for Cocoa Puffs over ‘reproductive rights’ she’s a frog with too many tadpoles. For those lobotomized from excessive childbirth who think fourteen kids is a good start, she’s a martyr.
Fred Phelps – The founder of the ‘God Hates Fags’ and ‘Thank God for Dead Soldiers’ movements is a preacher from Kansas who believes that everything wrong with the world is due to homosexuality and that the US is being punished by God for being ‘a sodomite nation of flag-worshiping idolators’. All this doesn’t stop his daughter from being a frequent guest on the Howard Stern show.
John V. Walsh M.D. – For those of you in favor of spreading the love around this professor of Physiology at the UMass Medical School and frequent blogger is your man. He supports indicting George Bush and impeaching Barak Obama. The good doctor argues that ‘Emperor’ Barak has assumed the war criminal in-charge role from George and therefore deserves a ticket back to community organizing but not the prison sentence ‘W’ should get.
The Peroni – The award for championing an economic policy most likely to lead a country from a vibrant, pluralist growth machine to, well, Argentina. The nominees are:
Barak Obama – Like the head coach of a struggling football team, you have to blame the president whenever anything goes wrong with the country even if he inherited the problem. He’s only let off the hook if things improve while he’s in office (tick, tock, tick, tock).
The Republican Party – Nice comeback folks……Not.
Hugo Chavez – A Socialist Winston Churchill with a TV variety show jones or a Fidel Castro running on less than half a tank of talent? (Editor’s note: The Venezuelan economy was a basket case before Chavez. Now the basket is on fire.)
Paul Krugman – Nobel prize winning economist who wants to roll the dice and mortgage the country to maximize stimulus funds ASAP. What happens if we don’t immediately hit the trifecta?
The Shady – The award for providing half-ass information on a topic the person has no expertise in whatsoever. The nominees are:
Barney Frank – Economics and Finance
Barney Frank – Government Oversight
Barney Frank – Rhetoric
CNBC – Maybe 24 hours a day of gushing CEOs and Wall Street Analysts isn’t journalism (David Faber’s investigative series excluded).
For the two or three of you who regularly read this stuff you can cast your votes in the comments section or email them to Shadyeconomist@gmail.com. I’ll post the results whenever I get around to it.
Monday, May 11, 2009
After consuming close to eight pages of 11 font double spaced text you’ll be relieved to find that I have nothing more to say about Systems Theory and its use in explaining how the global financial system performed a Triple Lindy over the past year. I do, however, have the following ideas on how to fix it and on how to prevent similar catastrophes from happening again (don’t worry, there will be all kinds of other financial disasters in the future due Capitalism’s endless ability to screw people).
1) Sensible Regulation – New does not necessarily mean better. Our elected politicians and the bureaucrats they supposedly oversee need to remember this. The first step towards a more sensible approach to regulating financial markets would be to repeal the Gramm-Leach-Bliley Act. In case you’ve never heard of it, it’s often referred to as the Gramm-Leach-Bliley Financial Services Modernization Act. Haven’t heard of that either? Well I’m not surprised because it received little attention in the press and its Republican sponsors and the Clinton administration wanted it that way. In 1999 GLB essentially repealed the Glass-Steagall act, a depression era law that, along with creating the FDIC, outlawed the ability for banks to own other types of financial companies like insurance companies and securities dealers. Glass-Steagall was seen as a good idea because depository institutions (commercial banks) are run differently than speculative institutions (securities dealers) for a number of reasons. The two best I can think of are 1) losses from securities speculation cold put a drain on deposits and 2) people managing deposits must be risk averse whereas people managing securities must seek out risk and manage it to provide an adequate return. In short, the ancients believed (because they had been burned so many times) that it was not a good idea to have your savings account in the same place where Fred from down the street was doubling down on Amalgamated Mining and Pet Food. Separating risked base investment from deposits makes a lot of sense and enables tighter regulation of securities (including derivatives) without smothering savings.
2) Uniform Lending Standards – Enforceable standards to protect both borrowers and lenders. The Mortgage Bankers Association (MBA) has proposed a “new federal regulatory framework” that would establish uniform national lending standards to replace the dog’s breakfast of current state and federal laws. The proposal also calls for the creation of a Federal Mortgage Regulatory Agency (FMRA). I’m OK with this as long as people like Barney Frank and Phil Gramm are kept away from the agency through the use of permanently installed shock collars.
3) Sensible Monetary Policy – There’s that word again. Why is it so hard to be sensible? First off, common sense ain’t so common (and you can quote me on that). Second, sensibility is subjective. I don’t think it’s sensible to shrink human heads but there are people in New Guinea who would call me shallow and elitist for thinking it so. Sensible, in this case, means using monetary policy to control the money supply to meet specific and economic objectives like keeping inflation under control, not as a tool to increase home ownership or inflate stock market performance.
4) Stop Investing in the Spread – I saved this for last in the hope that I could come up with a snappy title playing on the word spread (no such luck) and to try to form an articulate presentation of an idea (strike two). So here’s the rambling version short of a cute pun. Over the past three decades as financial markets have been deregulated and globalized there has been a great benefit delivered to our economy even after accounting for risk and the occasional recession. However, most of that benefit has gone to a very small number of people and has been focused on the short term. One could blame the success of hedge funds or the growth in size of mega-banks but I believe in comes down to where investment capital is going, not how. Simply put, we need to revive investing in things that create lasting value. This is not an easy task as the returns are not always as quick and as substantial as they are when you can make a quick buck shorting Sun Microsystems. What built our economy and national wealth was creating products and services that Americans and the world wanted to buy. Each year (present one excepted) Wall Street’s share of our economy rises. In the short term this looks good but is not healthy in the long term because making money off of making money does not add to our productivity as a nation. Investment in technology and process is needed to boost productivity and increased productivity provides tangible wealth. We need a strong banking and financial services sector in the economy but it should not be dominant. How we achieve a balance is tricky. We cannot rely on a centralized industrial policy as the federal government would surely mangle it. We can look to what has been present during past booms as indicators of success: relatively low taxes and inflation, divided government (one party in the Whitehouse the other controlling Congress), and government investing in tangible assets (the military, space exploration, infrastructure) to name a few.
Looks like we have a long way to go…
Monday, May 4, 2009
In the last post I focused on how monetary policy interacted with the housing market to create the housing bubble. A benefit of that bubble was a ‘wealth effect’ for homeowners. The wealth effect comes in two flavors: The first is having wealth. The second is feeling wealthy. It is the later of the two that enabled a decade of spending from which the US economy benefited mightily. As home prices rose in a feverish market, homeowners took advantage of the growing equity in their homes along with low interest rates to borrow against their equity. Home equity loans and mortgage refinancing became to the decade of the 2000’s what stock investment clubs and day-trading had been in the 1990’s. And with similar results: A lot of people made a lot of money but very few became wealthy.
The system below shows the interaction of home equity with wealth (feeling wealthy), consumption, and home prices. As with any systems diagram this is a simplified view of how many moving parts work together to influence each other.
As home prices rose the level of home equity increased for most homeowners. Rising home equity brought on a wealth effect that encouraged homeowners to borrow against the increased value of their homes. The cash taken out of the home equity loans, lines of credit, and mortgage refinancing was increasingly used for general consumption (vacations, paying off credit cards or car loans, and buying stuff) instead of being used for investment back into the home that could have added value to the home and potentially built wealth. The wealth effect also enabled homeowners to trade up from, almost always, a smaller home to larger one. The growing consumption increased demand for many goods and services, least of all was more housing and housing services. This, in turn, drove up home prices. This cycle spiraled upward with the help of low inflation, low interest rates, and ‘innovative’ financing (Mortgage Backed Securities (MBS), zero down payment mortgages, interest only loans, and loans to people you wouldn’t pee next to at a Red Sox game).
When home prices began to tank not only did the amount of equity decrease for homeowners, in some cases it went negative. The decrease in home equity led to a decrease in consumption. In the cases of negative home equity it led to homeowners owing more on their homes than those homes were worth. Demand shrank with diminishing consumption which led to a further decline in home prices. Some found themselves unable to sell or refinance an asset they owed more on than it was worth. Life then proceeded to rub salt in their wounds by reminding them they had adjustable rate or interest only mortgages and as time progressed and interest rates ticked up in 2007 and 2008 the shit hit the General Electric GE90-115B jet engine and sprayed across the global financial system.
With home prices down, demand for homes down, and consumption down only an easing of interest rates or an increase in available credit could help kick start the system back into upward spiral mode. But unfortunately many of the institutions that could have been there to help were so strung out from the financial heroin they had been mainlining the only thing they could do was call their friends Hank and Ben for a ride to the methadone clinic.
Now the headlines in the financial posts remind me of the final scenes in Rocky and Bullwinkle cartoons but instead of titles like “You've Got Me in Stitches or Suture Self “ or “Mud-Munching Moose or Bullwinkle Bites the Dust” we get “Your Money: Does God Want You to Be Bankrupt?” or “Americans Sell Valuables at Home Parties”.
So what happens next? That’ll be next week.