Thursday, July 31, 2008

Arnold's bold move; good idea, not far enough

So today, our governator signed an executive order to force the state to pay all non-essential personnel federal minimum wage, lay off all temporary workers, and suspend all payment programs until the state passes a budget. Basically, this is what the California constitution requires (not spending money without a budget), but the legislature has been wink-nudge ignoring it for the last 5+ years of budget impasses, and this year looks no different. Arnold is hoping the order will prod the legislature to do their f-ing jobs (not likely), and the political backlash won't be inaccurately attributed to him instead of the legislature (also not likely).

It's a good idea, I think, overall, but I don't think it goes far enough. The order allows for back-paying of everyone's normal wages after a budget is passed, so it really only hurts the lower-class employees who are less financially secure. Personally, I'd like to see a constitutional amendment which provides this action as an automatic consequence of not passing a budget on time, and have no provision for paying back amounts once a budget is passed. In essence, all non-emergency state employees would get federal minimum wage while the legislature was wasting time with their partisan fighting and shirking their responsibilities. Maybe we could also strengthen the balanced budget amendment at the same time to prevent carrying multi-billion dollar deficits.

It's high time the California legislature was properly admonished for their years and years of abuse, out of control spending, corruption, and outright idiocy. If we implemented the amendment, we might actually get an on-time budget, and that in and of itself would be a huge victory over the status quo for California's government.

Wednesday, July 23, 2008

Useful things Congress could do with $300 billion

Rather than being down on Congress for being corrupt and acting against the interests of the American people, maybe I should offer some suggestions for what they could better spend $300 billion dollars on than giving it to the lenders who created the housing bubble and resulting recession. So, in no particular order, here are some things Congress could spend money on which could help:

  • Reform GSE oversight (cost guess: couple million)

  • I'd suggest restricting their loan buying to conforming loans (eg: 20% down, fully amortizing) with a cap of say 5x the average annual income for areas. Enough to finance houses at sustainable prices, but restrictive enough to not get them into the $5.2 trillion dollar debt disaster we are currently bailing them out from.

  • Develop national RE listing/info database (cost guess: hundred million)

  • A national database for real estate listing, freely accessible to anyone, with uniform data presentation and historical information, would greatly help illuminate the current RE market situation. It could also prevent the manipulation of sales prices (eg: DAP) by requiring uniform data organization (ie: record where all the money goes, sales price is net to seller, etc.).

  • Reform Fed oversight (cost guess: couple million)

  • Congress could make it clear to the Fed that their job is to control inflation, not pump taxpayer money into failing over-leveraged investment banks. They could also set up some rules to make sure the Fed is succeeding, and not diverging into supporting their insider business buddies.

  • Get rid of the FHA (cost guess: saves money)

  • Really, the FHA is a poor excuse the subsidize people who should not be getting home loans with taxpayer money. Eliminating it would benefit the country and save money.

    There are a couple other small things they could do, like firing Sheila Bair for going on personal crusades instead of doing her job, or reforming the SEC rules to eliminate off balance sheet accounting and market manipulation by the SEC, or investigating Dodd for corruption, but those are minor changes. All the changes above combined would leave roughly $299.8 BILLION dollars left over, which we could actually not spend, and thus not create another $1000 debt obligation for every man, woman, and child in the entire country to pay for paying off the banks which created the recession. That sounds like it would be a smarter plan to me, but then again that's probably why I'm not a corrupt scum-sucking Congressional representative.

    Congress hurts American people, again

    It boggles my mind that the only people who honestly and bluntly report what the US Congress is going is not the mainstream media, but rather the small blogs and whatnot. Something has to change; it's just ridiculous that our government so blatantly acts against the interests of the people, and our media ignores it. Or worse, acknowledges their actions but misrepresents them as neutral, or even worse as beneficial. I'm not sure if their actions or the general stupidity of the American people in analyzing them is a worse blight on the country, but they are both pretty horrible.

    Today's idiocy is Congress spending $300+ BILLION dollars on absorbing bank losses for giving out the bad loans which fueled the housing bubble and kept housing unaffordable for responsible Americans.

    ...but wait, that's not all! In addition, they are refinancing millions of borrowers who "own" properties they cannot possibly afford and most of whom will default on their home loans into taxpayer-backed loans. So the taxpayers can expect the ultimate cost to be higher than the amount Congress is immediately giving to the irresponsible lenders as a "thank you" for creating the housing bubble.

    ...but wait, that's not all! They are also giving $4 BILLION dollars to municipalities, to buy foreclosed properties at inflated values so the banks don't have to sell them at market and can offset some losses to taxpayers.

    ...but wait, that's not all! They are also writing a blank check to the Treasury to pump unlimited government money into supporting the GSE's, which have fleeced the country for billions while the housing bubble they helped create was going strong, and funneled that money directly into the executives' pockets. Moreover, this should help prop up their bonds, which is great for all the investors who have been getting a better return on them than Treasury bonds because of the greater risk, which the government is eliminating by putting it onto, you guess it, THE TAXPAYERS!

    I don't think I can express enough how much I hate our government right now, although in fairness, they are just doing what the blithering idiot voters and corrupt media apparently let them do. WTB government for the people, are there any countries which still uphold that principle?

    Tuesday, July 22, 2008

    Setting up for a stock market crash

    So an interesting thing is happening in the stock market, and I thought I'd blog about it cause it was interesting to me. If stock market stuff bores you, you might want to skip this post.

    So, recently (a week ago or so), the SEC made a new temporary rule that investors will not be allowed to naked short the stocks of select, large, financial institutions. Basically, this means in order to sell shorts on those stocks, the brokerage selling the short must own the stock shares. Since there's was not really an issue with defaulting on naked shorts, and it's very market specific, the rule is not designed to prevent any negative effects, but rather strictly to manipulate the market.

    Now, normally, a stock is pushed in both directions by stock buying and shorting. Buying pushes a stock higher, as more bids are fulfilled. Shorting pushes a stock lower, as it's basically the opposite pressure on the stock price (the brokerage is selling shares it holds for someone else onto the market, which pushes the price down).

    Now something interesting happened as a result of the SEC rule: brokerages have marked the affected stocks as short-restricted, which means they're not selling shorts on them. Presumably, this was done to minimize risk of violating the SEC rule. It has the effect of pushing up prices artificially, because the normally present opposite pressure is suddenly removed.

    All good? Well, not really. See, when the price would get pushed down by shorts normally, now it will widen the bid/ask spread until you have a transaction, at which point the price will plummet. It basically removes the force which smooths out the down trends in stock prices, and makes them fall off cliffs instead.

    Now ask yourself, if you get bad news in the industry, and suddenly most of the stocks take a large, immediate nose-dive, what's going to happen? Well, you trip more limit orders all at once, which causes a mass sell-off. Suddenly, instead of a normal orderly price reduction, you have a panic-induced market crash. Way to go SEC, if your job is to manipulate the market to create a crash... not so good if that's not your job.

    Anyway, it's interesting that such a small change could potentially have such a profound effect. In this case, a "small" market manipulation by the SEC could very well cause the next massive stock market crash.

    Thursday, July 17, 2008

    History about to repeat; are you ready?

    I was reading the wikipedia page in the New Deal today (; it makes for fascinating reading. In particular, if you massage the timeline a little, and replace FDR with Obama, you get a fairly accurate representation of what's likely to be the case in about 6 months. Which makes the New Deal a fairly good model of what the government is likely to enact to try to pull us out of the current mess they have created.

    Let's look at the surviving long-term programs from the New Deal:

  • Social Security

  • This Ponzi scheme is the pride and joy of the New Deal, providing retirement and disability benefits for all Americans. It will be bankrupting the country around 2040 if not substantially modified/abolished before then, because it's a financial disaster which is a Ponzi scheme. I think we can count that as a negative outcome.

  • The FDIC

  • This institution provides insurance to prevent runs on banks, and establishes rules to prevent them from over-leveraging and becoming insolvent. The oversight has been laughable, but it has been reasonably successful at preventing bank runs, not counting the bank runs when banks fail. On the downside, it's woefully short of funds when banks actually fail, so it costs taxpayers billions. Overall, a push.

  • The FHA

  • This is the organization currently wasting billions of taxpayer dollars giving out ridiculous 100% LTV loans, and is supposed to be helping affordability in the housing market. So, a complete and utter failure of an organization.

  • The SEC

  • On the upside, created uniform investment and disclosure rules to prevent market manipulation and ensure a free market for investment. On the downside, laughably fails at oversight, company financial disclosures are incredibly obtuse and off balance sheet investments are rampit, and sometimes participates in market manipulation itself. So on balance, probably another push.

    What's really interesting about the parallel, though, is not so much all the failed socialism programs which were enacted during the time (some of which are still around and still failing), but how utterly unsuccessful they all were in reviving the US economy. Not surprising, in hindsight, that you can't jump-start a capitalism-based economy with socialist programs and government spending, and the government is pretty bad at running businesses (although that lesson seems forgotten regularly by socialism proponents).

    No, what's really interesting is the thing which finally brought the US out of the depression was WW2, which forced the country to go back to the businesses they had been stepping on and berating as evil, and beg them to produce again. That created jobs, trained workers, got rid of red tape, pushed money into the private sector, halted government controls, and basically suspended all the socialist programs which were dooming the country to malaise. I suspect we'll need a similar large-scale event to pull the country out of the mess Obama is likely to create trying to socialize the country, which leads me to wonder if the world will survive another world war.

    However, I'm probably getting ahead of myself. There were ~10 years of failed socialist policies between the market correction and WW2, and you never know if/when the external event will come which will save us from the politicians and their policies. In the meantime, we the people need to find a way to survive as best we can, with as many of our rights and as much of our well-being intact as possible. Fortunately, in this case, we have a spot-on historical parallel to learn from, and we're about to go through the exact same motions which turned a market correction into the Great Depression. Are you ready?

    Friday, July 11, 2008

    GSE's collapsing; is anyone surprised?

    A quick recap, in case you're not familiar with the recent financial news. We're in a housing asset price correction, driven by a lack of easy risky credit and an unwillingness of big banks to continue to sponsor deficit consumer spending at their own loss. Fannie Mae and Freddie Mac, two enormous companies who have reaped massive profits for their executives and shareholders during the bubble, are now being forced to acknowledge their losses, and rely on their implicit government bailout, which looks likely to eventually cost US taxpayers trillions. I ask: is anyone surprised?

    This entire economic cycle has been about privatizing gains and socializing losses. Everybody has been operating under the assumption of bailouts, from the large investment banks, to the GSE's, to the individual consumers. The GSE regulators have either been completely asleep at the wheel, or letting the GSE's do whatever they want with a "wink-wink" for an eventual bailout.

    How dense are the people who didn't see this coming? I mean, let's consider for a moment the proposal to have the FHA insure another $300 billion on home loans with 97%+ LTV. Raise your hand if you think less than 90% of those will default leaving taxpayers on the hook. Anyone with their hand up fails, goodbye, do not pass go and please do not hold public office.

    Ok, next: raise your hand if you think that loans which nobody will buy except the GSE's are likely to be just as safe as those made by normal banks pricing in risk because they don't count on a bailout when they are insolvent. Anyone? Hm, I guess all those people already flunked out of the class on the first question; good for you if you're left. Oh, I see you Mr. GSE regulator, hiding in the back, you're supposed to be making sure the GSE's don't incur excessively more risk than normal banks... you're very fired also, and hopefully the administration will vote to hold you personally liable for the GSE losses. It won't cover much of their trillions of bad loans, but it'll be something.

    Here's a news flash for all the geniuses in Congress: companies and individuals who expect a bailout when things go wrong will take excessive risk to make as much as possible while things are going right. In bailing them out, you encourage this behavior. In not ensuring they operate for long-term viability, you allow this behavior. In creating, regulating, overseeing, and guiding these companies, YOU (Congress) are responsible for their failure, and the trillions it's going to cost taxpayers. Good thing America already thinks you're doing a horrible job, and your approval rating is already down to partisan supporters only, cause this is a f-up of historical proportions.