Tuesday, October 21, 2008

Americans need a tax revolt

It occurs to me more and more often recently that the problem with taxation is not going to be fixed without a revolt. I was reminded of this with a news report about how voters in Massachusetts (Txachusetts?) are voting to eliminate their state income tax, and how all the politicians are bemoaning it as it would be horrible for the state. But I don't think so...

See, politicians in America always spend more money than they have. We have no sense of fiscal discipline, and we've run deficits at every level for so long that restraining spending is not really even a consideration any more. Look at the recent and upcoming stimulus and insider payoff packages: we've spent over a trillion dollars we don't have, when we're already $10 trillion in debt, and the only complaint was that the bills didn't have enough pork for everyone.

Eventually, this usually leads to higher taxes. For example, I predict that by the end of Obama's term(s), we will have substantially higher taxes, all his empty rhetoric promises aside. It's a somewhat inevitable consequence of socialist policies (and, I should point out, not uniformly undesirable among those advocating socialist wealth re-distribution like Obama). This is a good thing if you're an insider sucking off the teet of the ruling socialist party, and sucks if you're an average person trying to make a living and being sucked dry by said party.

What we need, as a country, is a hard limit to the amount of taxes any person is required to pay. I would make it in terms of percentage of income, since that's the form of taxes currently, although if we had a more sensible taxation system based on consumption it could certainly be a hard limit on consumption tax percentage. I think the current amount necessary to fund the federal government is around 22%, but I could be off by a bit.

Would this stop the government from running up deficits and spending more than they take in? Certainly not. However, it would likely prevent the periodic expansions of socialism in the country from draining the life-blood of the American dream from the people in the process, and give people a sense of stability with respect to the financial parasite which is our government. Moreover, when the government eventually runs out of money entirely and collapses from the weight of generations of financial malfeasance, at least the citizens will not have suffered unduly in the interim, and possibly as a result the country's economy might still be strong when the next government emerges.

That's my opinion anyway.

Monday, October 20, 2008

Open Letter to Warren Buffet

Not that he would actually read anything posted on an unknown blog, but I'm going to write in this style anyway...

Dear Mr. Buffet,

Recently you submitted a NYTimes opinion piece about it being a good time to invest in American equities. I have long been a believer in your wisdom when it comes to investing, but this recommendation raises some interesting questions which were not directly addressed in your piece, and I'm wondering if you could/would provide some much needed clarifications to your position.

First, as a supporter and adviser of Obama, I assume you are intimately familiar with his proposed and likely economic policies. Furthermore, I think most people would agree that you have a very broad understanding of the current global economic situation, and particularly the US situation. Given this, it seems clear that you would realize that the US is likely headed for the largest expansion of both government function and government oversight since the last time the current economic and political factors prevailed here in the 1930's. Historically, massive expansion of government oversight and function, nationalization of industries, and vilification of capitalism and industry by the prevailing political party has been very detrimental for corporations in America. Why do you believe that this time it will be different?

Secondly, your investment philosophy espouses buying stock in companies only when their fundamentals justify a reliable dividend return in excess of what can be received from traditional "safe" alternatives such as bonds and savings accounts. Yet in the current market, there are still few companies which dividend returns which would meet this criteria, and many of these are in the financial industry. With many insolvent financial companies only being kept alive by unprecedented unilateral revolving lending now in excess of a trillion dollars by the Federal Reserve, it's hard to fathom that you would consider those companies "safe" potential investments. How has your investment philosophy changed such that you would recommend this now?

- Me

Thursday, October 9, 2008

Self-reinforcing trends

There's a lot of talk these days about how to "fix" the problems in the economy. One of the major causes of both the initial problems, and the problems with the proposed solutions, is the concept of self-reinforcing trends (or spirals). Often these can cause problems to get much worse, and its hard to prevent them if you don't know (or choose to ignore) what's going on.

For example, the housing bubble was such a trend. As prices went up, lenders figured they could give a loan to anyone with a pulse and the ability to make a teaser rate payment, even if they were accruing negative equity, because when they sold in a few years the rise in asset valuation would cover the balance of the loan and then some. Buyers figured the same thing, which led to many people speculating on the premise of getting rich quick with virtually no effort required.

The housing correction has a similar trend, only in reverse. As house values decline, speculators default. Their foreclosed homes are resold for market value, which pushes prices further down, causing more people to be underwater. Of course, it's only the speculators and people who couldn't afford the houses they purchased who are being affected, but it turns out that's a huge portion of the people who "own" houses in the current market, enough that the government feels it needs to pay off their reckless actions with responsible people's money.

Then we come to the stock market. All the powers that be are trying to stop the market from going down, with all the powers they have. Unfortunately, we're in a spiral, and here's why: the market will go down more the more investors think the economy will be bad and governments will be manipulating the markets. As the various government organizations work to try to manipulate the market, the market reacts by going down more (correctly interpreting that more government interaction is worse for private businesses). Hence the self-reinforcing trend.

The big problem is, like all spirals in the past, and in particular like the Great Depression, it's likely to get much worse. We're likely to elect a socialist leader who will enact large-scale government interaction and manipulation to "stabilize" asset values, which will of course destroy them further. This will force the government to intervene directly, paying off bad debts and mandating benefits demanded by people hurt by the declining businesses. This will be paid for indirectly by higher costs to American businesses and of American goods, which will drive more businesses to extinction, and hinder the formation of new businesses. This will cause more people to demand more from the government directly, which the socialist government will happily provide in a series of New Deal type initiatives.

The even bigger problem is that modern societies have a pretty bad track record of pulling themselves out of self-reinforcing negative spirals; usually it takes an external impetus to force the government away from their self-destructive policies. Some successful ones in the past have been external attack, internal revolt, or similar large-scale disruption. For a counter-example, look at Japan: they have been in a self-imposed economic standstill for the last 15ish years, with interest rates basically zero the whole time and essentially no progress.

I don't know what will happen in the US, but I'm pretty sure it'll get worse before it gets better; and unless the electorate gets a lot smarter in a very short period of time, it could be very bad. Self-reinforcing trends suck.

Tuesday, October 7, 2008

Bass ackwards policies on housing

I know I've probably mentioned this before, but reading about another example today made me want to bitch about it again. For reference, the article I read was about how Fannie Mae will now be buying up bad loans from the Federal Home Loan Bank of Chicago. The action is somewhat expected given the recent nationalization of the GSE's, and thus their renewed emphasis on wasting money instead of making money. However, it also emphasizes the utter idiocy of government policy in the housing market.

The FHLB of Chicago nominally exists to provide below-market loans to people to help them afford to buy houses. Now, helping people afford to buy houses is not a bad idea in and of itself. However, this, in a microcosm, was a huge factor which lead to the housing bubble. Let me explain...

When you have subsidized purchases of assets (of any kind, assets or subsidies), and the asset prices are not set by an authority (ie: any free market), the asset prices will rise to compensate for the subsidization. This is especially true if subsidized buyers are competing for a fixed amount of assets with non-subsidized buyers, or only subsidized buyers are buying.

Now let's apply that to the housing market. You have a government entity (Fannie Mae, FHA, FHLB, etc.) offering artificially low rates to "stimulate" housing demand, now that they're not concerned with losing money. This makes it so that borrowers can afford higher loan amounts, which pushes up the price of homes. This makes the homes less affordable for anyone who is not subsidized, who complain that they too need subsidies. As the government expands the subsidy program, house prices continue inflating artificially, and the government is effectively giving money to people who arbitrage houses. Meanwhile, everyone else is being squeezed out of the market, because the prices are artificially high, and very unaffordable, and the original people receiving subsidies still cannot buy anything.

So let's review. The point of the plan was to make housing more affordable. The effects of the plan are:
- Housing is less affordable for everyone
- The government pays people who arbitrage houses
- Nobody is helped afford a house


Wednesday, October 1, 2008

The sadistic joke that is Congress

Come one, come all... witness the glory that is the American system of government and "representation" of the people. This week we are being treated to a quintessential example of the American political system at its finest. Some of the great and noble acts already on display or expected to appear:

- The house taking a 4-page monumental power grab and gigantic corrupt payoff bill, and transforming it into a 104-page monumental power grab and gigantic corrupt payoff bill with riders, pork, subsidies, and even more filth

- The president lying about the scope of the problem and the effects of the proposed "solution", to pressure Congress to pass the bill

- Congressional leaders pushing to pass the bill once it had all the pork they could stuff into it in only a few days, even though the overwhelming majority of people in the country (90%+) opposed it on principle

- A "rousing" empty-headed partisan bash speech by Speaker of the House Nancy Pelosi just before the vote, after political leaders had worked day and night for the previous week to convince people to vote for the bill as a bi-partisan compromise which was not going to blame either side for the mess

- The House rejecting the bill in a surprise stand against their political and lobbyist masters, followed by the inevitable partisan blame game in the media; many Republicans noted Pelosi's highly partisan framing of the bill as motivation for finally listening to their constituents

- The Senate, barred from originating appropriations bills by the Constitution, originates the same bailout bill as a "amendment" to an unrelated bill (which deletes the unrelated bill in its entirety)

- The Senate inflates the bill to 400+ pages adding pork, subsidies, unrelated programs, more bailouts, more spending, pet projects, and [they hope] enough payouts for specific politicians to ensure passage

- The small business and banking lobby organizations are mobilized to literally buy enough votes to pass the now enormous and atrocious bailout and omnibus pork spending bill

- [Presumably] The Senate passes the bill, and sends it back to the House, where they hope their bribes and payouts have bought enough votes to force the House to go against the overwhelming will of the people they laughably "represent"

- The House votes again on the same bill they rejected, but this time with 300+ extra pages of crap, and we find out if Congress succeeds in blowing out the national debt by 10%, paying off the financial industry as a "thank you" for causing the housing bubble and meltdown, wrecks the financial future of the country for generations, gives a proverbial bitch-slap to anyone (personal or corporate) who tried to be financially responsible during the bubble, and passing quite possibly the most nationally despised bill in the history of the country.

What a week!