Wednesday, April 30, 2008

Good paper on government number manipulation

Read it, understand it, be less confused when the government is saying everything is just fine and you're looking around going "uh, that doesn't make any sense". Then wish the people had some say in the government, so that we (the people) could force the economic statistics to be computed and maintained by non-governmental entities without implicit conflicts of interest.

Tuesday, April 29, 2008

Another rational plan to fix housing problems

Another thought for what the government could do to help keep people in their homes who are struggling with their mortgages, without bailing out anyone. I submit this since the politicians seem to be incapable of coming up with a plan which accomplishes the goals instead of bailing out irresponsible people at taxpayer expense.

So, first, identify people who are in trouble (behind on payments, etc.). To qualify for the new program, you must own only one house, and it must be your current primary residence (not interested in helping speculators). If you "own" multiple properties, you must sell all but your primary residence to qualify for help.

Then, establish a criteria for what constitutes an affordable house in general. I would suggest 3x gross annual income, as that is reasonable historically and makes the math for an average loan work. If your house is worth more than 3x your annual gross income, you get no assistance, as you cannot afford that house. Sell it, and buy a house you can afford.

For those who then qualify, the government could create a loan work-out program. A trustee would be appointed to pay bills during the process. During the restructuring process, the person would be shielded from creditors taking their primary residence, and the trustee would pay whatever was determined to be possible to the creditors. The restructuring would not eliminate debt, but rather restructure it so that reasonable payments could be made and the debt eventually paid off (even if the term was extended). Part of this could include changing the rates/terms of the loans, with agreement from the creditor. This period would last until agreements were met, and then the individual would "emerge" from the process and start paying based on the new agreements.

The law could also include a provision to allow people in this situation who are underwater on their loan to give up the home securing the loan, and not be personally liable for the balance. This would allow people to not pay debts significantly higher than the asset value.

Both of these options would, of course, be noted on credit reports, and effect the ability of the individuals to secure future loans for some period of time. To prevent it from being permanent, they should be removed after a set, but sufficiently long, period of time (say, 5-10 years).

What do other people think? Would this work? I'm thinking it would help the people who need it, while not rewarding the people who tried to game the system. It also does sound vaguely similar to some other processes I've read about somewhere...

Monday, April 28, 2008

PSA for people considering RE purchases

If you're considering buying real estate because it's "such a bargain now", I highly encourage getting some perspective. For example, take a tip from the jewelery business, where they always mark up by ~500%, so they can give huge discounts and still make a good profit. You don't think the store is taking a loss when they sell you something for 60% off, do you? Likewise, why would you think housing is a bargain if it's 20% off from a 300% markup?

Next, ask yourself this question when considering a real estate purchase: if the value declines by 25% and stays there for 15 years, and the refinance rate goes up to 15%, would I be ok? If yes, you can afford to make the purchase/investment. If not, you cannot afford it, and if it works out it will be by virtue of luck and not of prudent investment or forethought. Note that if you can afford it that doesn't mean it's a good investment; it just means you're not doing the investment equivalent of pushing all-in with the next 10+ years of your financial well-being holding 9 high.

Things to consider.

Thursday, April 24, 2008

Rant about random blog post

This rant devoted to this nearly content-free blog post:

Maybe it's just me, but this doesn't seem like much in the way of news. Syria wants to build nukes, they have good reasons for wanting them, Isreal wants to stop them and isn't afraid of bombing a facility before it is 100% active, and Syria isn't rebuilding their facilities as fast/public after the bombing... that about sum up the story?

News flash: North Korea has good reasons to want to have nuclear weapons too, and their building them, and they will have them because there's no Isreal equivalent with the balls to stop them in the region. All we can do is complain to the UN, argue about the merits of legitimizing terrorist organizations, and have purportedly legitimate presidential candidates tout the effectiveness next time of the yet unblemished by success foreign policy of saying "please don't do bad things". Those that forget history are doomed to repeat it indeed.

Wednesday, April 23, 2008

Food shortages rant

Lots to rant about here, so be prepared.

First, the panic people. Those are the sheeple buying up six months supplies of everything which could conceivably keep for six months, because, you know, there are food shortages and soon there won't be enough to eat. Get a grip: there's no shortages of general food in the US yet. Prices will rise with increased demand and reduced supply, but that's pretty much it. The US is one of the few countries that actually can produce enough food to feed itself (once idiots like the politicians who subsidize growing corn for ethanol are taken out back and shot); we're pretty unlikely to actually run out of food, as long as we allow the free market to work. There might be price gouging and commodities speculation, but there's unlikely to be widespread starvation.

However, I'm just as pissed off at the "this is America, we can't have food shortages" crowd. Those people are just as dumb as the panic hoarders. If you think that because you're in the US, and we're on some pedestal immune from global economic effects because of our birthright as the "good" country, you deserve to be the first one under the bus. Food shortages have happened in the US, and they are likely to happen again, and idiots who ignore reality because they think it doesn't apply to them should jump off a tall building and tell gravity you're an American.

But wait, you say... I said we're unlikely to run out of food, but then I said food shortages are likely to happen... which is it? Well, read carefully; I said if the free market is allowed to work, we'd be fine. Unfortunately, I have about as much faith in that happening as I do in the government not redistributing the savings of people who didn't buy during the housing bubble into the pockets of the people who caused the housing bubble: none.

What is our government, in their infinite wisdom, likely to do when inflation is spiraling out of control, food prices are up on lack of supply, and the poor people can't afford Starbucks any more? The same thing they have done in the past (and incidentally, Russia is doing right now): price controls. Aka, the bane of the free market, destroyer of supplies, perverted measures designed to make people starve. With price controls comes lack of passing costs to consumers, which means losing money, which means not producing those products any more, which means less food. At that point, we really will have food shortages, and our own government will have caused them (grats?).

If/when that happens, people will be justified in hoarding, because it's really a downward spiral from there. It'll be kinda like a swimmer trying to tread water while holding a hundred pound weight, cause he thinks the weight will somehow make floating easier. At that point, I guess we'll test the theory that it's impossible to ever have our government operate in the people's interest, because it really will be sink or swim time.

Anti-bailout story

Just linking it here is hopes that in some small part it causes more people to read it (maybe the google ranking will go up or something):

Monday, April 21, 2008

Macro econ and dumb pronoucements

So I was reading this article, and thinking about how much it echoed a general sentiment that it's not the Fed's fault they missed and didn't prevent the asset bubble which is now correcting, and how they would be unable to do so in general, and by extension the bailout is unavoidable. That's BS, IMHO, and I'll explain why.

It may be the case that the Fed will never be able to prove an asset bubble, but what they can certainly do (and absolutely should do) is ensure that banks and proxy banks have enough reserves to cover conceivable shifts in asset valuation. If any bank is in danger of failing and "too big to fail", it's a failure in the oversight of the Fed.

You can absolutely project potential asset valuations based on historical averages and probability distributions. You can figure out what the worst-case scenarios are, and make sure any bank (investment or otherwise) which is "too big to fail" has adequate reserves for the worst-case scenario.

- "But I can't make enough money keeping that much in reserve; it's too much of a burden." Divest until you're not too big to fail, then do whatever you want to make money speculating.
- "It's unfair to only force large banks to play by these harsh restrictions." See previous answer.
- "It's too expansive to account for all the complex investments which large banks have to figure this out." The banks should have the data, and if they don't, they need to divest themselves until they can comprehend their business. If they are going to have implicit federal backing, they should have comprehensive financial information.
- "This would force all banks to be size-constrained to below the 'too big to fail' cutoff." Here we get to financial nirvana, where the Fed doesn't have to spend taxpayer money to bail out any business which takes on too much risk, because they can all fail.

Anyway, that's how I think the Fed could/should eliminate the "too big to fail" syndrome in the market, and in doing so allow speculative bubbles to correct themselves without requiring a taxpayer bailout. Better plans are of course welcome; but "nothing we could do" from the Fed should be rejected for what it is: BS.

Wednesday, April 16, 2008

Food prices, global econ, and our fragile little world

So imagine you eat food, and want to continue to do so. Somewhere someone grows food, sells it, and eventually you buy it, and eat it. What could go wrong there?

Well, first, the American government (for the country which produces the most food) could be moronic, buy into the Church of Global Warming, and mandate (and subsidize) ethanol production. Nevermind that we would never be able to grow enough corn to significantly dent oil usage, or that it decreases the food supply; we must increase the corn growers' profits, the public demands it! This causes there to be less consumable food, which makes prices for the remaining food supply go up.

Then, add a bit of US currency devaluation, a convenient side-effect of the government spending money without bothering to procure it from anywhere. Convenient, in the eyes of policy makers, because it helps mask decreasing value of US assets, and increases US exports, because other countries can buy more stuff with their money. Of course, we get the same amount of US money for the increased exports, and farmers are not in business to give away money, so they just charge more in US dollars for the same amount of food (to everyone).

So, let's see... so far the US government is decreasing the supply of food and increasing its price. It's probably pretty good that they exclude food from the CPI-core index, otherwise they might have some upset people about now. In the meantime, just be glad you're in a country which produces and exports food, instead of one which relies on importing it.

Saturday, April 12, 2008

Economic cause/effect

Today's lesson of economic cause and effect, which may or may not be relevant soon: the effect of inflation on unrest, price controls, and the ultimate effects thereof.

When inflation happens, people get upset. Mainly, this is because the government is in effect stealing their savings through taxation. Also, though, because the poor individuals are less able to afford basic supplies, as their income generally trails inflation (especially if the economy is stagnant at the same time).

The general historical response to this has been price/wage controls. That is, the government will impose fixed prices on commodities, or fixed wages for people, in an effort to allow them to continue to purchase goods. Generally, this leads to increased costs for producers, as they cannot sell their goods at market even as their costs are rising. If their profit margin is small, they will soon be finding other lines of work, putting more people out of business and removing their goods supply from the system.

As this continues, obviously, the supply of those goods diminishes, and generally the quality decreases as well (as the surviving businesses are those which can produce the goods the cheapest to stay profitable the longest). In most cases, this might be acceptable; unfortunately, the typical case of price controls is food, in which case it's very bad when the supply and quality is reduced.

With imposing price controls, the government is essentially causing the exact effect it is trying to avoid: namely, increasing the shortage of the goods/food. In addition, a black market will probably develop where people can buy the goods/food for market price, which ironically will be vital to the country once the official supplies are suffocated into oblivion. Nevertheless, countries continue to practice these efforts, usually with the understanding that they are doomed to failure and leaving the country worse off than before, but to appease the uneducated masses who trust the leaders to understand the effects, and just want solutions.

A good thing to think about, just in case some short-sighted or plain stupid politician suggests imposing price controls, a moratorium on foreclosures, or some other equally destructive price control measure...

Tuesday, April 8, 2008

Signs of the times

FDIC Chairperson:
- Calls for more socialization of losses from the bad loans given by banks
- Is surprised that banks are still offering bad loans (after all the bailouts and socialization talk)

Los Angeles:
- Considers new taxes to put drops in their bucket of uncontrolled deficit spending, under the guise of The Church of Global Warming
- Proposes regulating the entire economy under carbon credits board, making success dependent on political favor

- Crafts bi-partisan legislation to make housing less affordable, reward banks who made bad loans and builders who made bad gambles, and give more taxpayer money to people with bad credit who will never repay it
- Considers more legislation to help the people who bought houses they couldn't afford, and to pay for the losses of businesses and individuals who gambled on the housing bubble

Federal Reserve:
- Gives another $50 billion to Investment Banks to socialize more losses
- IMF says governments need to do even more to socialize losses, prepare more aggressive socialization plans should current efforts fail to enrich the speculators and credit disadvantaged enough

How did our country get this bad? Where are the people struggling to preserve America? Where will the intelligent people go, or have already gone, as America completes its great, progressive transformation into a new people's state? Who (if anyone) will be John Galt?

Friday, April 4, 2008

What Congress could do to help fix the housing crisis

In the spirit of answering the question asked to Benny in the Congressional hearings, here's what Congress could do to help fix the housing crisis. No, I don't expect them to do any of these, or even anything in the right direction, but I figure at least one post in a sea of criticism should be what the right things to do should be.

1. Streamline the foreclosure process.
Foreclosures take on average 15 months to process from first missed payment to eventual resale on the market, and some take much longer. The process should allow some time between initial delinquency and re-possession, but everything from that point on should be as streamlined as possible. Work with states to ensure that once a house is foreclosed on, it's sold at market price ASAP.

2. Force lenders and lien-holders to move on properties
Some lenders are letting properties sit when payments are delinquent, so they don't have to take joint responsibility for them; this is very detrimental to the area and the market. Make lenders jointly responsible from the moment they are legally allowed to begin the foreclosure process, unless the forgive the entire loan at that point.

3. Actively oppose bailouts for speculators
Challenge the Fed's authority to give taxpayer money to IB's that over-leveraged. Vote against proposals to subsidize builders who overbuilt areas (such as those that provide incentives for people to buy those properties now). Vote against subsidies for people who buy specific types of properties (such as foreclosures), as this makes housing less affordable for people. Encourage investors to accurately value properties in the current market without subsidization inflating prices.

4. Challenge the lack of oversight
Ask how the Fed/SEC could let IB's get too big and interconnected to be allowed to fail, without splitting them up and/or diversifying their assets. Hold the oversight agencies accountable. Create new legislation to encourage oversight agencies to fight systemic risk in the market by actively opposing excessive leverage at vital financial companies.

5. Clarify lack of government backing of private companies
Explicitly legislate that GSE's are not government backed, and can fail if they make bad investments based on bad rules.

6. Consumer education
Fund consumer education, in the form of unbiased collections of information about historical housing prices, affordability ratios, and debt management. Use free internet resources as much as possible (as opposed to paid-for studies, which are inherently biased).

There ya go, Congress... that's what you can do to help.

Thursday, April 3, 2008

Lying to Congress should be a crime

I'm not sure why it's ok to lie to Congress as long as you couch your statements in financial or technical jargon and sound important, but apparently that's the status quo. Evidence the recent SEC statement about Bear Sterns, where they say there wasn't a capitalization problem, there was a liquidity problem.

Now liquidity problems certainly can exist. For example, if trading for a stock is halted on an exchange, and you hold shares, you have a liquidity problem. Or if you hold something which is in a time-lock safe, and you can't access it to sell it.

Now, say your borrowing more and more money to pay off previous borrowing, and eventually you run out of people willing to lend you money because they don't think they will get paid back, or the collateral you're pledging is considered worthless. That's not a liquidity problem; that's a capitalization problem. Same as if you think you should be able to sell something for $100, and the market will only pay $50 for it: that's pretty much the definition of a reduction in value of you capital.

Now the question is: what was the case for Bear Sterns? Well, let's look at the facts. They hold securities, which could be bought/sold at any time on the market (people were buying them, they still are buying them). They also borrowed money, by pledging their assets at whatever valuation people assigned to them, and getting rates based on the projected viability of their company (based on capitalization). They could certainly sell their assets, and/or get credit if they were adequately capitalized. So in fact, as long as they were adequately capitalized, they did not have a liquidity problem; no external force was preventing them from selling assets or borrowing.

So what actually happened? Well, duh, they wanted to borrow $100 against something the market thought was only worth $50. They didn't want to sell, because then they would have a capitalization problem (due to marking assets to the real market). They couldn't borrow, because the market thought (correctly, as a side note) that their capitalization was net negative. So they had a liquidity problem, not instead of, but because they had a capitalization problem!

Didn't there used to be a law against lying to Congress and the American people? Or does that just apply to companies who the SEC prosecutes?

Wednesday, April 2, 2008

Senate agrees to next round of bailout

From here (and many other places):

The Senate agreed in principle to a new bill which would spend more taxpayer money to bail out participants in the housing bubble. The provisions include:
- $100 million for counseling not take out liars loans with 100% LTV ratios, which will likely go to banks and lenders
- $4 billion to help prop up housing prices, stem bank losses, and make housing less affordable
- Approx $15 billion a year to reduce losses for banks which gave out bad loans and homebuilders who overbuilt chasing more profits
- Expand the size of loans insured by the FHA, so they can absorb more losses for bad loans

Contrary to the obvious feel-good propaganda about the legislation, this does nothing to help homeowners who bought houses they could afford stay in them, or anything other than put taxpayer money in the pockets of people who contributed to the bubble, while making housing less affordable for responsible people. It appears to be the strongest statement yet that politicians consider the voter brainless morons who will believe whatever they are told, no matter how preposterous.

How taxpayers are paying for the bailout

I replied to a forum elsewhere, but I figured I'd copy here, since it's an easy-to-follow summary of how taxpayers will foot the bill for all the irresponsible speculation and billions of bonuses paid to IB executives.

I believe the money trail in general goes something like this:
- Bank gives liar loan for 100% value in 2006 for max bubble value of home, securitizes the loan, sells to investors as part of a package
- Investors, who are not all idiots (contrary to current popular belief) buy what amounts to an insurance policy against losses of this very risky loans in the form of counter-party default swap agreements from investment banks (eg: Bear Sterns)
- Investment Banks buy and sel these obligations, accumulate large potential obligations, and value them relative to estimated chance of loss (which is low during the bubble)
- Bubble pops
- Investment Banks get some margin calls, forced to call in other insurance policies, triggers systemic margin call (great phrase, btw)
- Particular IB's realize they have more obligations than capital, and can't raise more capital because of their huge potential exposure (which is much more obvious post-pop), go to Fed
- Fed agrees to give them money to pay off their obligations to prevent everyone going bankrupt at once, even though they know they will take near 100% losses since their taking used toilet paper as "collateral"
- Treasury states that they will cover Fed's losses (although they are not legally allowed to do so without Congressional approval, but they will do it anyway), print money to cover losses
- Taxpayers pay for it

How's that for the money trail, in a easy-to-follow form?

Thoughts on McCain on Letterman

Was watching McCain on Letterman last night, and came away with a feeling of missed opportunity. Personally, I would really like to see an election contest between two (or more) candidates who would both be good for the country, both uphold the ideas of the US, both have intelligent views and plans, with just differences in actual implementation or specifics. Unfortunately, it doesn't look like we're going to get a democratic candidate with any of those qualities, which is going to make the presidential race more of an ideological contest than a choice between two good options.

There are certainly things about McCain that I don't like (his buy-in to the global warming religion, for example). I wish there was another reasonable candidate that I could measure him against, and be conflicted choosing between them. But as it is, it looks like the 2008 election is going to be a choice between utter idiocy, socialism, empty rhetoric, economic disaster, massive inflation, foreign humanitarian disaster, selling legislation to lobbyists, and active destruction of America... and John McCain. That's not a choice, that's a question for Smarter than a 5th Grader; and it's a missed opportunity to make the election more than a referendum on how stupid the American voters really are.

Tuesday, April 1, 2008

Followup on rules for public companies

Had a good idea last night, wanted to write it down. The more I think about it, the more I think it's awesome. We can call it Nick's rule of disclosure:

If the stock price of an public company declines more than 10% relative to the average for its industry, and/or public trading of the stock is suspended, and this event is not immediately proceeded by a public SEC filing of a disclosure or press release for a material precipitating event not related to the company's operations, the executives of the company shall be personally and jointly liable to the shareholders for the total loss in value, for failing their duty of adequate disclosure.

* Safe harbor:
- Companies and executives shall be exempt from this rule if they can show a concerted effort by an individual or group of individuals to artificially manipulate the stock price, and the SEC files charges as such.

Why would this be great? Because there should be no case where something is revealed which causes a large decline in the value of a public company which is not disclosed to everyone prior to the event. It would basically eliminate the CEO issuing bald-faced lies a week before the company goes under, and then resigning when stuff hits the fan. It would force disclosure before bad stuff became it became public knowledge, to avoid the risk of liability for concealing it. It would curtail insider trading by pushing forward disclosure timing. In short, it would be awesome.

File this under things that will never be done with the corporate interests owning Congress, but still a pretty dream.